Monetary Policy Committee decision

The Reserve Bank kept the repo rate unchanged at 5,5% yesterday, even as governor Gill Marcus warned of significant risks to the inflation outlook for the year.

With analysts and the Bank expecting inflation to reach the top of its 3%-6% target band this year, the next move in interest rates could be upwards for the first time since June 2008.

Analysts said the Bank’s action in keeping rates steady was in line with expectations.

"The monetary policy committee (MPC) is of the view that the risks to the inflation outlook are on the upside," Ms Marcus said when announcing the committee’s decision at a news briefing in Pretoria yesterday.

Rand at 33-month high

The rand climbed to a new 33-month high against the dollar on Thursday with dealers expecting it to firm further as international investors continue to flock to high-yielding assets.

On Thursday the rand rose to R6,78/$ by 0541 GMT, after touching 6.7775 earlier, its firmest since January 2008. It was 0.61 percent stronger than its Wednesday close of 6.8240. Its appreciation against a trade-weighted basket of currencies this year amounts to nearly 7%.

SA Reserve Bank: Statement of the Monetary Policy Committee

The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas declined to 3,7 per cent in July 2010, compared with 4,6 per cent in May. Goods price inflation measured 2,1 per cent in July, while services inflation, which had been relatively sticky, declined to below the upper level of the target range and measured 5,4 per cent. The categories of housing and utilities (mainly electricity) and miscellaneous goods and services (predominantly insurance costs) together contributed 2,2 percentage points of the 3,7 per cent inflation outcome. However, electricity price increases were lower than expected. There was also a quick reversal of the influence of the Fifa World Cup on some categories. This was particularly noticeable in the category of hotels which experienced a month-on-month price decline of 11,2 per cent. CPI excluding administered prices measured 2,9 per cent ie below the lower limit of the inflation target band.

Taylor's Rule for calculating prime interest rate

Taylor's Rule Estimating where interest rates should be. According to Taylor's Rule, the Prime Interest Rates should currently be : (a)   "neutral" Real Prime Rate                                                                          5.5%         (average September 1989 - July 1995; 1999 - 2007) (b)    Expected CPI inflation: 3Q 2011                                                               5.0% (c)      0.5 x (Current CPI - CPI  "target")                                                            -0.4%          = 0.5 x (3.7% - 4.5%) (d)     0.5 x (Output "Gap")         = 0.5 x (-2.2%)                                                                                            -1.1% Target Prime Interest Rate:                                                                                 9.0% Current Prime Interest Rate:  01 September 2010                                               10.0% Comment:   The current outlook for inflation and the slow recovery in the economy could still mean another 0.5% interest rate cut this month, prime falling to 9.5%, according to a simple Taylor rule.  By Cees Bruggemans, Chief Economist FNB

Insulating South Africa against global risks

In a recent speech, Reserve Bank Deputy Governor Daniel Mminele said that next week’s Q2 supply-side GDP numbers were likely to be “less stellar” than the 4.6% q/q saar growth recorded in Q1. Mminele presented an unchanged 2010 GDP growth forecast from that communicated at the Bank’s last MPC meeting, where it looks for the economy to grow 2.9%.

The deputy governor spent a large portion of the speech discussing the global economic crisis and continued to suggest that “uncertainties emanating from the global economy pose the main downside risks” to this projection.

On the rand, he said that the current low interest rate environment in developed nations had “resulted in a consistent search for yield. As a consequence, South Africa, like other emerging markets, had attracted significant capital inflows, which were supporting the currency.

The risks shaping us

FNB Comment, by Cees Bruggermans

Our interest rates are being kept unnecessarily high by massive tax increases imposed through public charging and excessive unionized labour demands, keeping both our inflation and inflation expectations overly elevated.

Vastly better public sector governance and less rigid labour market conditions would have lowered our inflation rate and expectations further by 1%-3% and made the outlook less risky.

That would have warranted a prime rate near 7%-8%. Instead, we are stuck at 10%.

Despite these heavy domestic millstones around our necks, these aren’t the only influences shaping us.

COSATU on interest rates

The Congress of South African Trade Unions deplores the Reserve Bank Monetary Policy Committee’s decision not to cut the repo rate but keep it at its current high level. The MPC has yet again today missed an opportunity to give a boost to economic growth and strike a blow for job creation.

President Zuma in parliament yesterday warmly welcomed the joint statement by manufacturers and the three trade union federations, Cosatu, Fedusa and Nactu, on industrial economic policy interventions needed to create decent jobs, which was signed two days ago.

That joint declaration identified one of the most serious problems facing our economy as that the unavailability of finance, and the exorbitant level of lending rates by the financial sector, which make borrowing prohibitively expensive.

SARB MPC decision on the repo rate

The [SA] Monetary Policy Committee decided to leave the repo rate unchanged at 6,5 per cent per year.

SARB Monetary policy stance: The assessment of the Monetary Policy Committee is that inflation is likely to remain within the inflation target range over the forecast period, and that the economy is expected to continue on a recovery path. The risks to the inflation forecast are seen to be more evenly balanced than at the previous meeting of the MPC. The main risks to the inflation outlook emanate from administered price developments and from the risks emanating from the global economy. The domestic growth outlook will continue to be affected by the global developments. The MPC will continue to monitor these developments closely.

For these reasons, the MPC deems it appropriate to maintain the current stance of monetary policy. Accordingly the repurchase rate remains unchanged at 6,5 per cent per annum.

Rand and Prime prospects

FNB Rex Column, by Cees Bruggermans

Many things are muddling the Rand outlook this year and next. Will the Rand still firm, or start a new weakening cycle, and can it differ per major currency?

The Rand should still firm nearer or even below 7:$, except that a ‘strapless bra’ condition seems to be holding up the Dollar.

The near zero US short-term interest rates offer no return on cash, encouraging capital outflows from the US, as was the case for much of last year, potentially weakening the Dollar and firming the Rand.

Repo rate to stay stable for some time to come

The repo rate -- which is the rate at which the South African Reserve Bank (SARB) lends money to commercial banks -- will stay stable "for some time to come", SARB Governor Gill Marcus said at a conference hosted by the Bureau for Economic Research in Sandton, Johannesburg.

"Of course, this depends on no major developments taking place," Marcus said.

There had been rumours that as a result of poor retail sales data for February, another cut was just around the corner. "I must warn against jumping to conclusions on one month's data," Marcus said.

She said it was important to look at the reasons for the latest repo rate reduction, which had taken place in March.

"Our statement emphasised that despite clear signs that the economy had emerged from the recession, the pace of recovery was still below potential. "We saw the improvement in consumption expenditure in particular as being tenuous."

Source: Mail & Guardian

Observations on interest rates in South Africa

Presentation by Dr Monde Mnyande, Advisor to the Governor and Chief Economist, South African Reserve Bank, to the Ombudsman for Banking Services, 22 April 2010

Most borrowers and savers would benefit if interest rates do not fluctuate excessively. Stable interest rates would bring greater certainty to the finances of savers and borrowers and assist them with planning. This is not to deny that some persons and institutions, such as those actively trading interest-bearing debt securities and interest rate derivative instruments, may prefer a fairly volatile interest rate environment. But for typical economic agents this is not the case.

Furthermore, from a cash-flow point of view it is also helpful if nominal interest rates are lower rather than higher. In this matter, however, sustainability is important: a very low interest rate environment which cannot be sustained and has to make room for a high interest rate environment is extremely damaging, particularly to borrowers.

Lower nominal interest rates can only be sustained if inflation is kept in check. Otherwise negative real interest rates will result as inflation accelerates with low nominal interest rates being maintained. Negative real interest rates are damaging to the economy, not least since such rates cause savers to subsidise borrowers, thereby undermining saving.

Relevance of the SA Reserve Bank to the development agenda

Address by Dr Monde Mnyande, Advisor to the Governor and Chief Economist, South African Reserve Bank (SARB), at the Inkululeko Media & Marketing Power Breakfast, Avianto Hotel, Muldersdrift,
09 April 2010

Stable prices, that is, low inflation, stable currency value and stable financial systems are bedrock ingredients for the economic wellbeing of any society. These ingredients form the core of what the South African Reserve Bank or any other central bank for that matter does. Explained differently, the realisation of these ingredients is the most important way in which the Bank can contribute to the developmental agenda of South Africa.

... The Bank's mandate is explicitly set out in the Constitution of our Republic as “protecting the value of the currency in the interest of balanced economic growth”. The main contribution therefore that the Bank can make to the development agenda of South Africa is primarily through the fulfilment of this mandate. The Bank fulfils this mandate by ensuring 1) price stability and 2) financial stability. To ensure price and financial stability, the Bank uses monetary policy and provides a variety of other essential financial services to the economy.

Reserve Banks says rate gap is 'immaterial'

The South African Reserve Bank on Thursday said the gap between the repo rate and the prime rate did not affect the cost of borrowing for consumers, contradicting unions who claim consumers are not fully benefiting from lower interest rates.

The prime rate is used by commercial banks as a benchmark when pricing loans and is 3,5 percentage points above the repo rate.

Since December 2008, the central bank has cut the repo rate -- the rate at which it lends to commercial banks -- by 550 basis points to 6,5%, and banks have lowered the prime rate.

But South Africa's powerful unions say consumers have been unable to benefit fully from lower rates because of the 3,5 percentage point margin and want the gap to be narrowed.

Welcoming the rate cut and prime 10%

FNB Rex Column, by Cees Bruggermans
 

It isn’t as if the economy now only has tailwinds blowing its recovery along.

The Minister of Finance will be reducing his budget deficit for a number of years in part by slowing growth in government spending. That’s a headwind.

The Rand has gained ground over the past year and the global forces driving it may not be finished. That’s a headwind, too.

Then there is the matter of heavily loading public tariffs – electricity, tolls. These are taxes by another name. That’s more headwind.

COSATU welcomes small cut in repo rate

The Congress of South African Trade Unions welcomes today’s 50 basis points cut in the repo rate, to 6.5%, by the South African Reserve Bank`s Monetary Policy Committee (MPC) Although this is too little-too late, we hope that it is a turning point and that the Reserve Bank has finally listened to the debate in the ANC, COSATU and civil society and accepted the overwhelming argument that monetary policy must be guided by a mandate to promote economic growth and job creation, and not just to control inflation.

The federation agrees with the MPC that “the pace of (economic) recovery is expected to remain slow”, and welcomes its recognition that “the improved inflation environment has provided some space for an additional monetary stimulus to reinforce the sustainability of the upswing without jeopardising the achievement of the inflation target”.

Marcus springs surprise rate cut

The Reserve Bank unexpectedly cut the repo rate (interest rate) by half a percentage point yesterday, taking its key lending rate to 6,5%, its lowest for nearly three decades.

Lower inflation, subdued economic growth and the negative effect of gains in the rand played a role in the decision of the monetary policy committee (MPC), which took markets by surprise.

However, Bank governor Gill Marcus took pains to dispel speculation that the rate cut was prompted by a clarified mandate letter from Finance Minister Pravin Gordhan last month.

The letter spelled out a range of factors considered by the Bank when it sets interest rates, making clear that it focuses on growth and employment, as well as inflation.

Reserve Bank MPC decision

The Monetary Policy Committee decided to reduce the repo rate by 50 basis points to 6,5 per per cent per year, see the latest Statement of the Monetary Policy Committee available from the Reserve Bank. 
Next meeting on 12 & 13 May 2010.

... The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas returned to within the inflation target range sooner than expected, in February 2010, when it measured 5,7 per cent. The moderation in inflation was fairly broad-based. The main contributors to the inflation outcome were the categories of housing and utilities and miscellaneous goods and services. The former category was driven mainly by electricity price increases of 26,8 per cent, while the latter category was driven by insurance costs relating to housing, health and transport. Food price inflation declined to 1,0 per cent, while communication costs declined by 22,0 per cent. Administered prices excluding petrol and paraffin increased by 10,8 per cent. Producer price inflation increased to 3,5 per cent in February 2010, compared with 2,7 per cent in the previous month. Food price inflation at the producer level remained well contained. Agricultural food prices declined at a year-on-year rate of 13,5 per cent, while manufactured food prices declined by 1,2 per cent. ...

Easing real interest rates another notch

 FNB Rex Column, by Cees Bruggermans

The argument for further SARB interest rate easing should not be of the mindless variety, simply advocating deep nominal easing in support of populist ‘easy’ money.

That’s the way to ruin as other countries have shown before and our own history is not devoid of such policies.

But that doesn’t mean there is no longer any scope for a judicious easing of real interest rates, even if fairly late into this particular cycle.

Taking care of the last point first. Globally, this is a very extended interest rate cycle, less so for countries that did not experience much of a recession and remain near potential growth, but certainly for countries that experienced deep recession accompanied by much resource slack and still far removed from potential.

Interest rate cut next week?

The rand’s rally to a 2½ -month peak against the dollar has raised the odds of an interest rate cut at the Reserve Bank’s policy meeting next week, although most analysts believe rates will be kept steady.

Comments yesterday from one of the Bank’s deputy governors, Renosi Mokate, who spoke about the effect of capital inflows on the rand, added to the speculation.

The rand has appreciated more than 3% since the last monetary policy committee meeting (MPC). It was trading at R7,29 to the dollar late yesterday after touching R7,27/ earlier in the week, its firmest since January 5.

Extremely low interest rates in developed countries were prompting investors to put their money into emerging economies to take advantage of higher yields, she told a leadership conference.

Strauss-Kahn warns over policies to weaken the rand

The MD of the International Monetary Fund (IMF), Dominique Strauss- Kahn, said “the way to help exports has more to do with competition in the economy rather than the value of the currency.”

Improved competition would also create more jobs and curb inflation, raising the living standards of the poor, he said.

Trade unions and some senior members of the African National Congress have been lobbying for changes to the official policy of allowing markets to determine the exchange rate of the rand.

The unit was at R7,39/ late yesterday, a level Strauss-Kahn said was probably at the “strong end” of a manageable range.

Sustained rand strength has fanned fear about the competitiveness of local exports, which are leading SA out of recession.