The MPC to keeps Repo Rate Unchanged at 5.75 percent

By Vivian Atud

We should expect the South African Reserve Bank to keep the repo rate unchanged – at 5.75% due to the lower trajectory of headline inflation and continued weak state of the economy. This was also the case at the previous MPC meeting. Let me start by introducing my readers to the objectives of monetary policy in South Africa and the MPC. According to the reserve bank the primary objectives of monetary policy is to achieve price stability in the interest of sustainable and balanced economic development and growth. Price stability reduces uncertainty in the economy and, therefore, provides a favourable environment for growth and employment creation. Furthermore, low inflation contributes to the protection of the purchasing power of all South Africans, particularly the poor who have no means of defending themselves against continually rising prices. So why should the bank leave the rates unchanged?

The SA economy still has a moderate inflation outlook and downside risks to economic growth and increasing the repo rate would not be a good decision. The timing of future interest rate increased would depend on the “evolution of inflation expectations, the speed of normalization of monetary policy in the US and the state of the domestic economy”.

Keeping interest rates unchanged will probably be a correct decision, given the collapse in the oil price and the slight firming in the trade-weighted rand.

Consumers both households and businesses will continue to enjoy paying unchanged interest rates for their debts thus their disposable income will not be impacted in the short-run. Consumers who are able may want to take this opportunity to pay certain debts faster at lower interest rates before rates go higher maybe later this year. The current repo rates also offer great opportunity for business to extend their loans and expand operations so as to improve production, employment and growth within the economy. Government also has the opportunity to kick start and operationalize some of its infrastructure projects. Ordinary households and businesses are in for greater relief as fuel prices are expected to decrease further in February.

What to keep watching as we look forward to the next MPC Meeting

There are a couple of factors that will inform the banks decision to raise interest rates in the near future. These factors include Gross Domestic Product (GDP), inflation, oil prices, the value of the rand among others.

Looking at GDP, its growth outlook remain subdued, and the risks to its forecast moderate on the downside. According to the bank’s forecast, GDP growth in 2014 declined marginally from 1.5% to 1.4% and forecasts for 2015 and 2016 were revised down from 2.8% and 3.1% to 2.5% and 2.9% respectively- they might even be revised further downward in today’s MPC meeting. “This restrained outlook were consistent with the Bank’s composite leading indicator of economic activity which continues to trend sideways, with a slight upward move as noted in the previous MPC meeting.

 Inflation has been positively favoured by the lower oil prices- these are expected to continue in the near future. Headline consumer inflation remained inside the SARB’s 3-6% target band and decreased from 5.8% in November to 5.3% in December 2014. Inflation is expected to average 5.3% in 2015 and 5.5% in 2016. Given the reduced oil price, inflation for 2015 may average at 5%.

Food price inflation, which remains a major driver of inflation, is expected to moderate in the coming months, off the back of lower producer prices of crops and cereals.

The domestic petrol prices had declined by a cumulative R2.19 a liter since August 2014. Should current trends continue, a further decline of around R1.1 cents per liter can be expected in February 2015? The price would have even been lower had the weaker rand not wiped away some of the value. Consumption expenditure by households is subdued, but could improve consumers get pay raises and more stable labour negotiations in 2015.

According the SARB, the US and UK remain the main drivers of global growth, although it may it may be decreased by lower oil and food prices – providing some relief to consumers. Looking at the -Eurozone –its outlook has been improved after the zone adopted the quantitative easing policy last week.

The outlook for emerging markets is mixed, “with emerging Asian economies expected to benefit most from the positive spillovers from the US recovery.”

This is expected to offset in part the adverse impact of the slowdown in China, where growth is expected to be lower than in the past few years, as the economy rebalances away from investment towards consumption. This moderation is expected to continue to impact negatively on commodity prices.” Global inflation is expected to moderate in the face of benign food price inflation and falling international oil and other commodity prices.


South Africa’s consumers will continue to enjoy steady interest rate as long as the economic fundamentals both locally and globally remain unchanged. The outlook for economic growth and possible changes in the interest rates during the next MPC remain bleak. Oil prices are weak and are expected to remain low in the short run positively impacting on petrol prices in South Africa which are expected to decrease again by about R1.1 in February 2015. Consumers who can should continue to pay off their debts before further interest rates hikes. Businesses can take advantage of the current interest rates and engage in some expansion projects


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