Interest rates remain unchanged

Luigi Marinus, Portfolio Manager at PPS Investments.

The South African Reserve Bank governor announced the Monetary Policy Committee (MPC) decision to keep the repo rate unchanged at 6.5%. Two factors that lead to this decision were the MPC forecasting inflation to peak at 5.9% - which is below the top of the target band – and August inflation printing at 4.9%, which was lower than expected. The governor did emphasise the view of targeting the mid-point of the band to provide scope for inflation surprises and moving away from an effective acceptance that a level slightly below 6% should provide opportunities for rate cuts.

Of particular interest was the MPC vote which was four votes for no change and three votes for a 25 basis point hike. Considering a rate hike in a technical recession, with the pressures already faced by South African consumers, highlights the sensitivity placed on the inflation forecasts. Changes in the exchange rate and the price of oil could noticeably adjust the forecasted inflation levels and lead to inflation edging above the top end of the target band.

With many factors that could be considered, it remains apparent that the MPC views the level of inflation as the primary concern in their mandate. They continue to use short-term rates as the tool to influence inflation, even at times when it is increasingly difficult to de-emphasise other factors affecting the South African economy.