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South Africa: The easing cycle is over

Thu, Oct 22 2009, 18:51 GMT
by Stanislava Pravdova

Danske Bank A/S

The South African central bank (SARB) announced that the Monetary Policy Committee

(MPC) has decided to keep the key rate unchanged at 7.00%.

Details

The South African central bank decided at its MPC meeting today to keep the key policy rate unchanged at 7.00%. This decision was in line with our and the consensus expectation. The market reaction was very limited with yields slightly up and a slightly weaker rand against the dollar.

Assessment & Outlook

The comments from the SARB governor, Tito Mboweni, were rather hawkish before the rate announcement mainly due to increased risks to the inflation outlook. Governor Mboweni said that nobody in the committee argued for an interest rate reduction.  In the statement, Mboweni said that the economic growth is expected to improve in the coming months as there are indications that the rate of contraction in the economy has declined, though the recovery will be tentative. When commenting on inflation, he said that inflation is expected to be in the target range on a more sustainable basis in Q2 2010. Mboweni also said that the main risks to inflation stem from cost pressures in the economy such as requested power price hikes, which will have a significant impact on inflation going forward. Regarding the rand, the governor said that he does not have a preferred level for the exchange rate. In response to an article this morning that the government is planning to “freeze” the rand exchange rate, Mboweni said that existing monetary policy continues to pursue a floating exchange rate and that the article was “concocted”.

Today’s unchanged rate decision has to be seen in light of increased inflationary risks stemming from requested power tariff increases, which will undoubtedly push inflation up bsignificantly if implemented. We therefore believe that the easing cycle is over, and are considering revising our interest rate outlook. We now expect the South African central bank y to begin a tightening cycle in 12 months.

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Published on  Fri, Oct 23 2009, 10:13 GMT