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South African Central Bank Has No Room to Cut Rates

         Date: 2012-05-08

           Tag: South African, South African Central, Bank

Summary: South Africa’s economic growth appears to be sustainable, though moderate, and there is little or no room to lower interest rates further with inflation at the top end of the target range, central …

The Reserve Bank’s current monetary policy stance is accommodative because of a negative output gap in Africa’s biggest economy, Marcus said in a speech in Zurich and posted on the Pretoria-based bank’s website yesterday.

South Africa’s economic growth appears to be sustainable, though moderate, and there is little or no room to lower interest rates further with inflation at the top end of the target range, central bank Governor Gill Marcus said.

“However, the expected inflation trajectory suggests that there is limited, if any, room for further monetary accommodation at this stage,” she said. The central bank has to be concerned about the impact of lower interest rates on inflation, and reducing rates won’t necessarily help make the rand more stable or competitive, Marcus said. The rand may be “moderately overvalued” at current levels, she said.

The Reserve bank has kept the benchmark rate at 5.5 percent, the lowest level in more than three decades, since November 2010, to support the economy as a slowdown in Europe, a key trading partner, threatens demand.

Inflation slowed to 6 percent in March and the central bank forecasts it will ease to be sustainably within the band by the end of the year. The Monetary Policy Committee is scheduled to announce its next decision on May 24.

Some economists, such as Razia Khan, head of Africa research at Standard Chartered Bank in London, say the first rate increase may come later this year.

“Although the negative output gap persists, perhaps it is what Governor Marcus did not say that will resonate more,” Khan said by e-mail yesterday. “At what stage should the SARB be signaling the likelihood of interest rate normalization.”

Rand Overvalued

The volatility of South Africa’s rand creates problems for setting monetary policy and isn’t “helpful for the real economy,” Marcus said. While the central bank has been active in the foreign-exchange market to build its reserves, it doesn’t try to set a level for the currency, she said.

The rand may be moderately overvalued at current levels, according to a study by the bank, Marcus said, without giving an estimate of overvaluation.

“There is an incorrect perception that the Reserve Bank attempts to keep the exchange rate strong in order to help with inflation,” she said.

The local currency has gained 3.7 percent against the dollar this year after declining 18 percent in 2011, according to data compiled by Bloomberg.

Unemployment Target

Consumer spending has led the recovery from recession in 2009 and credit demand and retail sales growth are accelerating. Lending by commercial banks to households and businesses rose 9.2 percent in March from a year earlier, the fastest pace in more than three years, according to the central bank. Retail sales increased 7.2 percent in February compared with 4.2 percent a month earlier, the statistics agency said April 18.

Economic growth, though, remains less than half the 7 percent the government estimates is needed to meet its goal to create 5 million jobs by 2020. Unemployment was 23.9 percent in the fourth quarter.

The economy will probably grow at a similar rate this year to the 3.1 percent for 2011, Marcus said. Conditions in advanced economies remain fragile, she said.


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