No Change in Interest Rates but Economic Worries Grow

Reserve Bank Governor Gill Marcus announced no change in interest rates today, following the latest meeting of the Reserve Bank’s Monetary Policy Committee (MPC), but she certainly did not rule out rises at future meetings.  She said 5 members of the MPC wanted to hold rates, while 2 wanted to raise rates.  The Governor noted that at 6.1% CPI inflation, the rate has moved above the 6% ceiling – and is expected to remain outside to 3% to 6% target band for some time.  There is a host of worrying economic data.  The strike in the platinum sector is expected to have a significant negative impact on exports, as stocks of platinum are depleted.  The Bank’s GDP prediction for this year has been revised downwards from 2.6% to 2.1%.  Unemployment remains elevated in a declining growth environment.  Sobering stuff.  But what did our experts make of it all? 

Dr Andrew Golding, CE of the Pam Golding Property Group:

Maintaining stability in the interest rate sends a positive message and reinforces much-needed confidence among home buyers and investors, and hopefully will further improve sentiment and add impetus to the recovery in the property market. Coupled with this is the fact that mortgage lenders are demonstrating an increased appetite for lending which is ultimately the most important driver of activity in our property market.  One does however need to be circumspect regarding this optimism  in the light of the Consumer Price Index inflation edging upwards – and as a consequence the fact that consumers continue to be beset by rising food and fuel costs, as well as electricity, water and municipal rates and tariffs, all of which erode disposable income. Another source of concern is the extent to which the country’s GDP growth is lagging targets required for sustainable growth, which is necessary for the property market to prosper and thrive.

Ian Cruickshanks from the SA institute of Race Relations:

This decision not to change interest rates was expected.  The Reserve Bank’s economic forecasts have led to expectations of stagflation, with GDP growth downgraded from 2.6% to 2.1% for 2014, with downside risk.  This comes with the JSE at record high prices, at levels difficult to justify.  

Sizwe Nxedlana from FNB:

Despite the Reserve Bank’s decision not to raise interest rates at today’s meeting we think it is only a matter of time before interest rates are raised further. Domestic inflation is now above the upper limit of the Reserve Bank’s 3% to 6% target. We expect inflation to accelerate further and to remain above 6% for the rest of this year. The South African economy also remains vulnerable to rising global interest rates given its large current account deficit, which has been placed under more pressure by the impact of labour unrest on platinum production and exports so far this year. Rising US rates will increase the difficulty of funding the current account deficit. This is likely to keep the rand under pressure and place further upward pressure on consumer inflation. Against this background we think it is only a matter of when, not if, interest rates will be raised again. However, the magnitude of the interest rate hiking cycle may not be as severe as previous cycles given current weak economic growth.

Nedbank Economic Unit:

The inflation outlook has improved on a firmer rand and growing evidence that the change in US monetary policy is unlikely to alter global liquidity dramatically in the short term or result in a one-way bet against emerging market assets and currencies. The risk to the inflation outlook remains on the upside given the rand’s vulnerability, sticky administered prices and the negative relationship between wages and productivity growth. The Reserve Bank tweaked its inflation forecasts slightly downwards, with headline inflation now expected to rise to a peak of 6.5 % (6.6 % previously) in the final quarter of 2014, before drifting back into the target band by the second quarter of 2015. Real economic conditions deteriorated sharply in the first quarter and the outlook for growth remains subdued. The strikes in the platinum mining industry continue to cast a long shadow over the economy, undermining confidence throughout and limiting the upside for the year as a whole.  The MPC is still left with the unenviable task of countering rising inflation in a weak and vulnerable economy. With inflation already outside the Bank’s target range and expected to remain so for some time to come, the Governor once again reiterated the MPC’s bias towards tighter monetary policy over the medium term. The pace and magnitude of the tightening will depend on trends in the rand, inflation and the real economy. Given the setbacks to the economy and the lack of underlying consumer and business confidence, the MPC will try to limit rate hikes to modest increments until more convincing evidence of economic recovery emerges. We expect that the MPC will raise rates by only 25 basis points in two of next few meetings, with the repo rate ending the year a cumulative 100 basis points higher.


A sigh of relief from borrowers, but no joy for lenders.  But what was really of note was the catalogue of economic woes outlined by the Governor.  Especially the downgrading of expected GDP growth this year.   Not good for job creation! 

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