Rates Watch: January 2015 – Thank you Oil!

There will be no change in the repo-rate tomorrow. How can I be so sure?

The main reason to shift the repo-rate is if inflation moves outside of the 3% – 6% band that the South African Reserve Bank has set as its target. Very basically: lowering rates drives inflation up (by injecting cheaper credit into markets) and raising rates decreases it (by increasing the price of credit).

In 2014 inflation was near the top end of the target band (even breaching it a few times) but largely thanks to a dramatic decrease in the price of crude oil and the resulting decline in the price of petrol, South Africa’s CPI dropped from 5,8% (close to the upper end of the target band) in November to 5.3% in December. This is a good indication that inflation is at the start of a downward trajectory. And with the oil price still sitting below $50 per barrel inflation it is certain that the CPI will continue its downward trajectory through January and into February 2015.

This means there is no reason, from an inflationary standpoint at least, for the SARB to increase the repo-rate at its January MPC meeting tomorrow. Furthermore South African consumers (in general) are deeply in debt and an increase in the repo-rate would raise the cost of their debts at a time when they were beginning experience a tiny bit of relief. Local sentiment has to be taken into consideration when making monetary policy (at least a little).

So, even though the SARB stated last year that it believed that the South African repo-rates cycle was looking at an upward trend South Africa’s high level of debt, the economy’s sluggish growth as well as its reliance on global market factors means that really the SARB has had to adopt a ‘wait and see’ policy for the last few years. SARB Governor Kganyago said as much at the World Economic Forum in Davos last week:

“You have got to strip out the effects of the oil price, the effects of the food prices, and then say what is happening to the rest of inflation – and that is too early to call.”

And too early is right: inflation figures may be down on the back of lower than expected oil and food prices but will this have a long term downward pressure on inflation or will the Rand’s continued weakness negate any gains? Time will tell.

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