SIM: Reaction to MPC meeting announcements from Arthur Kamp

Today’s decision by the SARB MPC to leave its repo rate unchanged was relatively straightforward. Economic growth is picking up momentum and the Bank’s medium term inflation forecast was lowered only slightly. Moreover, recent global financial market volatility appeared to feature prominently in the decision with the Bank seemingly wary of introducing additional volatility into the currency in an already uncertain environment.

The forthcoming GDP data release should confirm the economy expanded at a relatively robust pace in the first quarter at around 4 per cent annualized. Also, in our view, although headline CPI should continue to slow to May – possibly to around 4 ½ per cent – that should mark the bottom of the inflation “cycle” with CPI expected to increase to around 5 ½ per cent. Although inflation could surprise to the downside relative to this forecast if the Rand maintains its strength, it is increasingly clear the business cycle upswing is well under way with manufacturing production posting solid growth in excess of 6 per cent annualized in the first quarter of 2010 compared with the final quarter of last year. Moreover, real retail sales recorded a double digit annualized advance in the three months to February compared with the previous three months and vehicle sales are also buoyant. It seems we are too far advanced in the cycle to still consider cutting interest rates.

The favourable news is that inflation is expected to remain within the inflation target range for an extended period although potential risks, such as current high wage demands, were highlighted by the MPC. The Bank expects CPI to remain below 6 per cent until end 2012 at which point its forecast points to an inflation rate of 5.3 per cent. Moreover, the advance in the economy is not expected to exceed its potential this year or next. Hence, one hopes for a stable repo rate for an extended period.

The SIM base case is no further change in the repo rate through 2010.