News Column

Interest rates a balancing act

May 23, 2014

Reuters and Joseph Booysen

THE Reserve Bank kept interest rates unchanged as expected at 5.5 percent yesterday, saying that although the bank remained in a monetary tightening cycle it had to consider risks to economic growth.

"The MPC (monetary policy committee) continues to face the difficult dilemma of dealing with upside risks to inflation and a deteriorating domestic economic growth outlook," Reserve Bank Governor Gill Marcus said.

Most economists surveyed by Reuters had expected Marcus to keep rates unchanged after a surprise 50 basis point increase in January to stave off bubbling inflation pressures.

The bank slashed its 2014 growth forecast to 2.1 percent from 2.6 percent forecast in March, adding that growth in the first three months of this year was expected to be the lowest quarterly expansion since the 2009 recession.

Marcus said the rand was also likely to remain vulnerable to changing perceptions about US monetary policy - a factor that helped drive the currency to 5-year lows in January. The rand has recovered from those levels, hitting a year-high last week.

Inflation hit 6.1 percent last month and the bank said it expected it to remain outside its 3-6 percent target band until the second quarter of next year.

The rand firmed marginally after the decision and was trading at 10.3455 to the dollar, 0.2 percent stronger on the day.

George Herman, portfolio manager at the South African Reserve Bank, said: "The MPC, with this decision, acknowledges the tough growth environment and their desire not to undermine whatever growth there might be and also not to burden an already struggling consumer. This course of action will appease foreign investors as to the MPC's commitment to their mandate, but also its sensitivity to the domestic growth dynamics."

Dave Mohr, chief investment strategist for Old Mutual Wealth, said the decision to keep the rate unchanged was very much as expected.

"The major reason for this can be attributed to the Reserve Bank's growth forecast for 2014, reduced from 2.6 percent to 2.1 percent, which reflects the weak state of the economy."

Mike Greeff, chief executive of Greeff Properties and exclusive affiliate of Christie's International Real Estate, said: "Many property investors will in all likelihood be pinning their hopes on predictions by economists that the prime rate is not likely to climb significantly from now until the end of the year, and should finish 2014 at around 9.75 percent."

Seeff Properties chairman Samuel Seeff said that while household debt had been coming down, a rate hike would see home loan affordability take a knock, as would the ability of consumers to service their monthly debt, including bond repayments.

"The knock-on effect on the basic cost of living, with increases in the prices of especially food and transport, will put further pressure on the burdened household budgets. Consumers should therefore continue to focus on paying off their debts, put off on luxuries, and save, save, save."

Cape Argus

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Source: Cape Argus (South Africa)

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