Cape Town – The SA Reserve Bank’s decision on Thursday to keep the repo rate unchanged at 5.5% shows it is “wide awake at the steering wheel and in touch with the real world,” according to George Herman, portfolio manager at Citadel.
He said the decision clearly shows the belief by the Monetary Policy Committee (MPC) that inflation will normalise soon, shows and that it wouldn’t hesitate to hike the rates should the outlook deteriorate.
“The MPC, with this decision, acknowledges the tough growth environment and their desire not to undermine whatever growth there might be and also not to burden an already struggling consumer,” said Herman.
He thinks this course of action will appease foreign investors.
Herman explained the number of factors that have influenced the MPC’s decision:
South Africa has fallen somewhat behind the rest of its emerging market (EM) peers regarding the hiking of official interest rates.
“This makes the currency especially vulnerable again as we still have one of the largest current account deficits in the EM universe,” said Herman.
The current mining strike has negative impacts on mining, retail and manufacturing, but mostly effects exports. This exacerbates the country’s current account deficit situation.
“Growth has absolutely vanished. All expectations of growth for 2014 are already hastily being reduced as the expectation for first quarter growth now seems a negative number,” said Herman.
“South Africa’s strained labour relations are now really hurting the overall economy.”
Inflation is expected to rise to 6.5% soon, but also to peak there and return below 6% within a year.
The major pressures on inflation – food and petrol – have already started to subside as the rand improved from its weakest levels earlier in the year.
“With inflation at 6.5% and the repo-rate at 5.5% South Africa has a full 1% negative official real rate,” said Herman.
“Over time, this cannot be maintained as it’s assured that the currency will depreciate under such circumstances.”
He said the MPC is caught between a rock and a hard place.
“They can see inflation rising and emerging market peers increasing rates. On the other hand, they can see inflation coming back in a year’s time and also that economic growth is anaemic with low income consumers under severe strain,” said Herman.