Reserve Bank to Increase South Africa 2016 Growth Forecast

  • Economic growth for the year will remain low, Kganyago says
  • Currency’s renewed depreciation reflects domestic concerns

The South African Reserve Bank will increase its 2016 growth forecast after the economy fared better than expected in the three months through June, Governor Lesetja Kganyago said.

“With the relatively good second-quarter figures released on Tuesday, the Monetary Policy Committee of the South African Reserve Bank will be able to revise up its annual estimates at the September meeting, but the annual figure will remain low,” Kganyago said in a speech in the southern city of Port Elizabeth Wednesday.

Africa’s most-industrialized economy avoided a recession by expanding an annualized 3.3 percent in the second quarter, after contracting 1.2 percent in the previous three months, as mining and factory output rebounded, the statistics office said Tuesday. The median of 19 economist estimates compiled by Bloomberg was for 2.6 percent growth. The central bank said in July the economy won’t expand at all this year.

The MPC has raised its benchmark lending rate by 125 basis points since July last year as it sought to steer inflation back into its 3 percent to 6 percent target range. While the committee would like to respond to slow and below-trend growth with lower interest rates, it has had to make some unpopular decisions due to the nature of factors driving price growth, such as food costs and wage increases, Kganyago said.

“Monetary policy decisions necessarily involve trade-offs, and the MPC has opted for trade-offs that serve our inflation-targeting mandate and the long-term interests of all South Africans,” he said. “Had the starting point been different –- had inflation been well within the target range –- we could have made different choices.”

The central bank forecasts inflation, which slowed to 6 percent in July, will only return to the target band in the third quarter of next year. The next interest-rate decision is scheduled for Sept. 22.

While Kganyago said last month the rand’s gains provides a cushion for policy, the currency weakened against the dollar following reports that Finance Minister Pravin Gordhan was summoned by police in relation to a unit set up in the South African Revenue Service that allegedly spied on politicians when he headed the tax agency between 1999 and 2009. Perceptions of South African risk are important for the currency and the renewed weakness reflects local concerns, Kganyago said Wednesday.

The rand weakened 0.4 percent to 14.0355 per dollar as 5:07 p.m. in Johannesburg. Yields on rand-denominated government bonds due December 2026 fell 11 basis points to 8.62 percent

The MPC left the benchmark repurchase rate unchanged at 7 percent at its last two meetings and said in July it has pressed the pause button on the cycle of policy tightening. The central bank had made it clear that speculation about an end to the interest-rate increase cycle and the possibility of rate cuts were premature, Kganyago said.

“South Africa’s risk factors had not subsided,” he said. “At the time, we believed that the rand’s appreciation would not last –- as indeed it did not.”

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