Economic commentary: SARB monetary policy statement by Arthur Kamp Investment Economist at Sanlam Investments

Arthur Kamp, Investment Economist at Sanlam Investments.

The South African Reserve Bank’s Monetary Policy Committee (MPC) sketched a bleak picture for the South African economy when it released its Monetary Policy Statement at the conclusion of its March 2015 meeting. While growth remains a concern amidst weak private sector fixed investment, stalling employment growth and constraints on consumer spending (partly due to the impact of tax hikes), the Committee stressed the upside risk to the inflation outlook.

Despite the latter, the Bank left its repo rate unchanged at 5.75 per cent per annum, since the forecast breach of the upper end of the Bank’s inflation target in 1Q16 is expected to be temporary, while upside risk to the inflation target largely reflects exogenous factors over which the Bank has little, if any, influence. Also, growth is expected to remain subdued (the Bank forecasts real GDP growth of just 2.2 per cent and 2.3 per cent in 2015 and 2016 respectively, as electricity shortages contributed to constraining potential growth to 2.0 – 2.5 per cent in the short term) with little domestic demand pressure on prices.

It seems clear, however, that the SARB MPC views the recent slowdown in inflation to 3.9 per cent year-on-year in February 2015 as temporary, reflecting mainly lower fuel prices, while core CPI currently remains elevated at 5.8 per cent. The Bank also noted inflation expectations for 2016 and 2017 were revised up by respondents in the latest survey. Meanwhile, the annual advance in unit labour cost remains stubbornly high. Further, it appears especially worried about the possible consequences for the Rand (and therefore South African inflation) from expected policy rate hikes by the US Federal Reserve – possibly later this year. Given this concern and an upward revision to the MPC's average headline CPI forecast for 2016 from 5.4 per cent to 5.9 per cent (despite no change to the Bank’s electricity price increase assumptions), further interest rate hikes are possible as the Bank seeks to “normalise” monetary policy, although the extent and timing of this is highly uncertain. But, for reference, the domestic FRA market suggests an interest rate hike is possible before year-end 2015. Much will, however, depend on the future direction of US monetary policy and its potential impact on the Rand and ultimately domestic wage increases and inflation.