South Africa: Repo Rate Static Until Extent of Oil Shock is Determined

Talking Points:

• Headline CPI falls 0.4 pp from 7.6% to 7.2% in December 2014
• SARB to wait and see full effects of oil price shock and rand exchange rate before adjusting rates
• USD/ZAR Range Trades

Effective from July of 2014, the South African Reserve Bank ‘s Repo rate stands at 5.75% and looks to remain static until the SARB can assess the full impact of oil’s price shock on the economy. Thus, as explained by Governor Lesetja Kganyago, December’s drop in the consumer price index may not necessitate an immediate move in the interest rate.

Reported at an annual rate, CPI fell from 5.8% in November of last year to 5.7% a month later in December. Component by component, the annual rate of inflation for food and non-alcoholic beverages fell by 0.4pp from 7.6% to 7.2%, housing and utilities decreased from 5.8% to 5.7%, and transportation declined by 1.7% due to a 69 cent/litre drop in the price of petrol. However, while headline CPI is on the decline 4Q inflation expectations see the weakened rand continuing in its role as a shock absorber.

After taking into account the views of analysts, trade unions, and business people, the average expectation for CPI in 2015 was lowered by 0.3pp to 5.8%. While lower, this figure still remains near the top of the target’s 3-6 percent band. As noted by Governor Kganyago, during an interview at the World Economic Forum, this placement should be taken under consideration when determining the appropriate repo rate. With headline inflation falling and expectations still raised, policy makers will likely take a wait and see approach, monitoring the interaction between oil prices and the rand exchange rate.

At present it is unclear whether oil will be sustained at $50, creating a natural disinflationary pressure, or whether an ECB QE (if implemented) will led to a rand appreciation as did the Fed’s QE.

USD/ZAR Daily Chart

Chart Created by Walker England Using MarketScope2.0