BoB keeps interest rates steady

Brian Benza | Tuesday June 17, 2014 06:59

 

After a monetary policy committee meeting yesterday, the Bank’s head of communication Andrew Sesinyi announced that the bank rate would be maintained at 7.5 percent. This means commercial banks will also keep their prime lending rates at 9.5 percent.

BoB said in a statement that the current state of the economy, domestic and external economic prospects, and the inflation outlook, suggest that the current monetary policy stance is consistent with maintaining inflation within the Bank’s objective in the medium term.

 “Accordingly, the Monetary Policy Committee decided to maintain the Bank Rate at 7.5 percent,” reads the statement in part.

 With inflation well contained within the bank 3-6 percent objective, the central bank this year will maintain its accommodative monetary policy stance aimed at boosting economic activity particularly in the non-mining sector.

Pulled down by weak demand, the non-mining sector is performing below trend as government restrains expenditure real personal incomes. 

In 2013, non-mining output grew by a low 5.2 percent while mining rose by 10.6 percent and it is expected that non- mining economic activity will remain below the potential level in the medium term.

“We will continue to maintain an accommodative MPS for some time. We expect output to be below trend and foreign inflation to be benign and while there is a pick up in South African inflation we don’t expect a big upward impact on the exchange rates, which supports a moderation of domestic inflation,” Kealeboga Masalila, head of monetary and financial stability told a media briefing last week.

Citing a favourable outlook the BoB cut the benchmark bank rate by two percentage points last year to 7.5 percent as inflation, measured by Consumer Price Index (CPI), eased to a four-decade low.   

However, inflation quickened slightly to 4.5 percent year on year in April from 4.4 percent in March and analysts forecast the trend to continue for the remainder of the year leading to a slight upward adjustment of the bank rate.

In a market commentary, researchers at Rand Merchant Bank (RMB) recently said that while higher inflation has come from domestic sectors, there is a lot more inflation that will come through from imported goods in the coming months. 

“Domestic demand is proving weaker than expected so inflationary pressure is being offset. Furthermore, risks to this forecast are now to the upside. The main danger is we see further rand weakness, which would add to imported inflation,” said analysts Nema Ramkhelawan-Bhana and Celeste Fauconnier.

They further noted that, “Administered and food prices are also at risk and we expect the central bank to hike the bank rate by 50 basis point by the end of the year. We maintain our forecast of 4.5 percent inflation for 2014”.  

Any upwards adjustments to the bank rate will be felt most by borrowers who have been enjoying favourable interest rates on loans since the 200 basis point bank rate cut last year.

The central bank says the favourable inflation outlook could be adversely affected by any unanticipated large increase in administered prices and government levies, as well as higher than currently forecast international oil prices.