4 reasons for July's unchanged interest rate - KPMG's Maura Feddersen
In line with market expectations, the central bank’s Monetary Policy Committee (MPC) announced earlier this month that it would leave the leading policy rate unchanged at 7%, keeping the prime lending rate at 10.5%. Maura Feddersen (pictured), Senior Economic Advisor with KPMG Economics, Financial Risk Management, has identified four reasons why the South African Reserve Bank (SARB) kept interest rates unchanged.
"In view of muted domestic growth, unchanged interest rates will give much-needed relief to South African households, which remain under pressure in light of low consumer confidence, rising debt levels and high unemployment However, if changes in the global and domestic environment cause a significant shift in the inflation outlook, the MPC is likely to act decidedly to maintain price stability."
1. Global search for yield bolsters rand exchange rate in spite of Brexit uncertainty
The UK vote to leave the European Union is expected only to have a 'fairly limited' direct short-term impact on South African growth and trade, said South African Reserve Bank (SARB) Governor Lesetja Kganyago in his bi-monthly MPC statement on Thursday. In a global search for yield, uncertainty and lower returns in developed markets have given impetus to greater capital flows to emerging market economies like South Africa.
The strengthened exchange rate has contributed to a lower inflation forecast, although these developments remain sensitive to possible changes in US monetary policy and global risk perceptions. Governor Kganyago noted that since the last MPC meeting, the rand exchange rate had appreciated 12.2 percent on a trade-weighted basis.
2. Inflation expectations decline but anchored at the upper end of the inflation target
In line with expectations, the headline consumer price index (CPI) annual inflation rate in June 2016 was 6.3 percent, up 0.2 percentage points from 6.1 percent in May. Although in breach of the SARB's inflation target range of 3 - 6 percent, the Bank now anticipates a lower average annual inflation rate of 6.6 percent in 2016, down from 6.7 percent previously. Inflation is expected only to return to within the target range in the third quarter of 2017.
3. Growth outlook muted with signals of possible turnaround
Despite positive growth in the mining and manufacturing sectors in the second quarter of this year, as well as a surprise increase in retail and wholesale trade sales in May, consumer and producer confidence remain muted. Therefore, although the MPC anticipates the subdued domestic growth environment to have reached a low point in the business cycle, the recovery may be tentative.
4. Favourable balance of risks
In combination with US monetary policy tightening less likely in the near term and inflation forecasts surprising slightly on the downside, the MPC unanimously voted to keep the lead policy rate at 7 percent, and thereby unchanged.
About the author
Maura is a Senior Economic Advisor in the Economics team in Financial Risk Management at KPMG Services South Africa and is also responsible for running the KPMG Interest Rate Survey and KPMG Client Perception Survey. She has a Master of Commerce in Economics specialising in South African trade and macroeconomics. She can be contacted at [email protected].
Article courtesy of KPMG South Africa.