South Africa Monetary Policy Unchanged in March


The Monetary Policy Committee of the South African Reserve Bank decided on March 20th to leave the main interest rate unchanged at 5.0 percent.

Excerpt from the statement by the South African Reserve Bank:

There are a number of key developments that this meeting of the Monetary Policy Committee (MPC) had to consider, not least among them on the domestic front the challenge of moderate growth, rising inflation, a depreciated currency, a wider current account deficit as well as difficult labour relations and unemployment that remains stubbornly high.

Since the previous meeting of the MPC the domestic inflation outlook has deteriorated slightly. Risks posed by the depreciation of the rand exchange rate have overshadowed the more favourable developments, including lower electricity price increases and some moderation in food price inflation. Nevertheless inflation is expected to remain contained within the target range apart from a temporary breach in the third quarter of 2013. The domestic economic growth prospects remain fragile amid continued tensions in the labour market, particularly in the mining sector.

The inflation forecast of the Bank reflects a slight deterioration in the inflation outlook for 2013 compared with the previous forecast. Inflation is now expected to average 5.9 percent in 2013 and 5.3 percent in 2014, compared with the previous forecasts of 5.8 percent and 5.2 percent for these respective years. Inflation is expected to breach temporarily the upper end of the target range in the third quarter of 2013, when it is expected to average 6.3 percent, and then to moderate gradually to 5.2 percent in the final quarter of 2014. This deterioration is largely due to the depreciation of the rand and higher petrol prices, which more than offset the impact of the lower electricity price increases and a lower starting point.

The exchange rate of the rand continues to pose the main upside risk to the inflation outlook. Since the beginning of the year, the rand has depreciated by 8.4 percent against the US dollar and fluctuated within a range of R8.45 and R9.26.

Domestic factors contributing to the recent rand depreciation include continued work stoppages in parts of the mining sector, which also have the potential to disrupt electricity supplies, and the further widening of the deficit on the current account of the balance of payments, which measured 6.3 percent in 2012. Some narrowing of the deficit is expected during the course of the year in response to the depreciation, although the degree of response will be constrained by weak demand from advanced economies as well as strong infrastructure-related import demands.

Domestic growth prospects remain relatively subdued notwithstanding a better-than-expected fourth quarter GDP growth outcome and positive developments in the mining and manufacturing sectors in January. The moderate pace of recovery is expected to continue in 2013. The Bank’s forecast is for growth of 2.7 percent this year, marginally up from the previous forecast of 2.6 percent, and 3.7 percent in 2014, compared with a previous forecast of 3.8 percent. The risks to these forecasts are assessed to be on the downside.

The MPC continues to assess the monetary policy stance to be appropriately accommodative given the persistence of the negative output gap. At the same time, further accommodation remains constrained by the upside risks to the inflation outlook. The MPC has therefore decided to keep the repurchase rate unchanged at 5.0 per cent per annum. The Committee will continue to apply monetary policy consistent with its mandate of price stability within a flexible inflation targeting framework.


South African Reserve Bank | Joana Taborda | joana.taborda@tradingeconomics.com
3/20/2013 11:46:45 AM