The MPC keeps Repo Rate Unchanged- What does this mean for ordinary consumers?

Following the announcement that the South African Reserve Bank has unanimously decided to keep the repo rate on hold – at 5.75% due to the lower trajectory of headline inflation and continued weak state of the economy, many south African are grappling with what this means for them and their consumption. 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 did the bank leave the rates unchanged yesterday?

As announced by the new SARB governor, the SA economy still has more moderate inflation outlook and downside risks to economic growth and increasing the repo rate would not have been a good decision-the bank said. They added that the timing of future interest rate increased would depend on the “evolution of inflation expectations, the speed of normalisation of monetary policy in the US and the state of the domestic economy”.

 “The decision to delay the ‘normalisation’ of interest rates was probably the correct one, given the collapse in the oil price and the slight firming in the trade-weighted rand. This has clearly helped the short-term inflation outlook and, indirectly, therefore also the medium term outlook as current inflation has a strong bearing on longer-term inflation forecasts.

Enough about what the bank said- what does the decision to keep rates unchanged mean for ordinary consumers in South Africa?

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 in 2015. 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 December.

What to keep watching as we look forward to the next MPC in January

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 has declined marginally from 1.5% to 1.4% and forecasts for 2015 and 2016 have been revised down from 2.8% and 3.1% to 2.5% and 2.9% respectively. “This restrained outlook is consistent with the Bank’s composite leading indicator of economic activity which continues to trend sideways, with a slight upward move recently,” said Kganyago.

 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 in both September and October at 5.9%. Inflation is expected to average 6.1% in 2014, 5.3% in 2015 and 5.5% in 2016. The MPC assesses the risk to the headline inflation forecast to be broadly balanced.

“At this stage it is unclear whether this (lower oil prices) is a temporary shock, or if it will be sustained or decline further.”

Core inflation is seen averaging 5.6% and 5.7% in 2014 and 2015 respectively and 5.3% in 2016.

Food price inflation, which remains a major driver of inflation, is expected to moderate in the coming months after falling from a peak of 9.5% in August to 8% in October, off the back of lower producer prices of crops and cereals.

The domestic petrol prices had declined by a cumulative R1.17 a litre since August. Should current trends continue, a further decline of around 70 cents per litre can be expected in December? 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 as the effects of the platinum strike dissipate. “Consumption expenditure could be positively impacted by lower petrol prices,” said the governor.

On the other hand, since the previous meeting of the MPC, the rand has depreciated marginally against the US dollar, but appreciated by 2, 1 per cent and 3, 5 per cent against the euro and sterling respectively, and by 1, 8 per cent on a trade weighted basis. SARB expects the rand to remain volatile, susceptible to sudden shifts in investor sentiment and global monetary policy stances. Enough about what is happening in South Africa internally, let’s look at how global growth might affect interest rates in SA

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 remains “bleak” – particularly in core countries like France and Germany, but lower food and oil prices and further monetary easing may have a positive impact.

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.

Credit advances to corporates were “buoyant”, growing 15.3% in September, while banks pulled back in lending to households, Kganyago said. Credit extension to the household sector grew 3.7% in September. “These trends are likely to constrain consumer demand in the coming months,” he said.


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 70cents in December 2014. 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 projec

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