SARB MPC escapes the ‘stagflationary’ vice-grip by appeasing both sides of the equation

SA GDP growth is under severe downward pressure due to various well known factors. The Monetary Policy Committee (MPC) is very sensitive to this and thus did everything they could not to hike rates. By only hiking 0.25% they hope not to hamper economic growth.

Inflation is however under some pressure as well, with higher averages expected for the next 2 years. The biggest positive however, is that the peak in inflation seems due in the 3rd quarter of 2014. Global food prices have started declining already and this would remove pressure from SA inflation. Various risks remain for inflation though: The exchange rate; upward spiral in wages and geopolitical risks and their effects on energy prices.

The central bank is also acutely aware of the apprehension in emerging markets (EM) as global monetary policy is normalised. This could pose a significant risk to EM assets, should yield searching investors leave our shores for other higher yielding destinations. We thus also have to stay in step with our global peers, so keeping within the current hiking cycle shows the discipline that earns a central bank global investor respect. By only hiking 0.25% though, they also show empathy with our domestic growth impediments.

Another brilliant performance by the SA Reserve Bank MPC as they can’t be faulted for their thoroughly balanced action.