The repo rate will remain unchanged at 5% per annum said South African Reserve Bank (Sarb) governor, Gill Marcus today. Marcus said the decision on the rate was unanimous and that there had been no discussions around a rate cut.
Year on year inflation, as measured by the consumer price index (CPI), for all urban areas increased to 5.6% in October this year from 5.5% in September edging towards the top end of Sarb’s 3-6% band.
Sarb said it revised its growth forecast downward from 2.6% to 2.5% in 2012. “Growth in 2013 is now expected to average 2.9% compared with 3.4% previously, while the growth forecast for 2014 has been revised down from 3.8% to 3.6%,” said Marcus.
Concern over wildcat strikes
Marcus said the MPC is concerned about the recent trend in wage settlements, the conduct of the parties involved in the recent labour market instability, the violence, and the potential negative impact on the economy, particularly on growth and investment. “These developments could also result in lower growth in the employment creation or an absolute decline in employment. Although the reported headline increases granted in some of the settlements are higher than the actual average increases, there is no doubt that the increases granted are well above inflation,” said Marcus.
She warned that this would increase aggregate demand in prices and result in a possible wage-price spiral which could negate the real benefits of these wage increases to workers. “We are saying that we need to have a South Africa that has confidence and direction that addresses the uncertainty that has been created given the recent events. Everyone has a role to play and make sure that there is coherence in what we do. We need to recognise the weaknesses that exist in relationships. We need to ensure that South Africa is a destination of choice,” said Marcus at the press conference.
Impact on the Rand
The exchange rate has been influenced by internal rather than external developments. “More recently, domestic factors appear to have become dominant determinants of the exchange rate. These include the increased risk posed to the economic outlook by labour market developments in the mining and agricultural sectors in particular; the widening deficit on the current account of the balance of payments, which is likely to have been exacerbated by the stoppages; and the ratings downgrades by two rating agencies while also retaining a negative outlook,” said Marcus.
The Rand is expected to remain sensitive to both unfolding domestic economic and political developments in addition to global risk perceptions. “The extent to which the weaker rand feeds into inflation will be dependent on the trading range of the rand going forward and the duration of these moves. Most analysts do not expect further weakening of the rand from current levels and a number of them expect some recover. However, the rand is expected to remain volatile and subject to overshooting, and its depreciation poses an increased upside risk to the inflation outlook,” said Marcus.