S.Africa keeps rates held at 5.5% - CNBC Africa

S.Africa keeps rates held at 5.5%

Southern Africa

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South African Reserve Bank governor Gill Marcus. PHOTO: University of Johannesburg

“Despite a more favourable global growth environment, the domestic economic growth outlook has deteriorated markedly. There is still no end in sight for the protracted strike in the platinum sector, and the economic and social costs are escalating and potentially devastating,” Gill Marcus, South African reserve Bank governor, said during the Monetary Policy Committee meeting.

Marcus added that both the mining and manufacturing sectors appear to have contracted in the first quarter, with the electricity supply constraints adding to the weak outlook.

In March, the South African Reserve Bank (SARB) kept the repo rate steady at 5.5 per cent per annum in a bid to stabilise rising inflation pressures in a subdued economic growth environment.

(READ MORE: S.Africa MPC keeps rates on hold at 5.5% in March)

In January, rates were raised by 50 basis points in an effort to curb the rand’s deterioration during a tumultuous wave of negative emerging market reaction to the United States Federal Reserve’s end to tapering.

“The weak state of the economy cannot be resolved through monetary policy actions alone. The committee continue to hold the view that we are in a rising interest rate cycle, and interest rates have to be normalised in due course,” said Marcus.

The year on year inflation rate measured by the Consumer Price Index for all urban areas measured 6 per cent and 6.1 per cent in March and April 2014 respectively, up from 5.9 per cent in February.

(READ MORE: S.Africa CPI rises but isn't cause for alarm)

According to Marcus, inflation is expected to average 6.2 per cent in 2014 compared with 6.3 per cent previously, with a peak of 6.5 per cent, previously 6.6 per cent, expected in the fourth quarter. The forecast average inflation for 2015 remains unchanged at 5.8 per cent.

According to HSBC however, the rand’s stability in the past few months has provided minimal market relief, but low manufacturing production figures, coupled with labour sector unrest, has been the spanner in the cogs of Africa’s second largest economy.

“The exchange rate is likely to remain sensitive to domestic factors including development in the current account in the balance of payments, and perceptions of its sustainability,” Marcus explained.

Although the FNB/BER Consumer Confidence Index improved marginally in the first quarter of 2014, it remained at a low level of -6. Growth in bank credit extensions to households is however on the moderation path.

The international oil price has remained within the range of 105 US dollars to 111 US dollars for some time, and should current trends continue, a further petrol price reduction can be expected in June.

The Johannesburg Stock Exchange's All-Share Index breaching the historical 50,000 points mark this week could also bode well for South Africa's capital markets.

“The Monetary Policy Committee continues to face the difficult dilemma of dealing with upside risks to inflation and a deteriorating domestic economic growth outlook,” said Marcus.

“Although the immediate pressures from the exchange rate are lower than was the case earlier in the year, the exchange rate remains a significant source of upside risk to the forecast. The respite from the stronger exchange rate could be temporary.”