South Africa: SARB Sticks To 'Wait-And-See' Approach‏

The South African central bank (SARB) announced that the Monetary Policy Committee (MPC) decided at Thursday's MPC meeting to leave the key policy rate unchanged at 5.00%. Such a decision was broadly expected. Even though the statement from the SARB on Thursday was perhaps squeezed slightly more on the dovish side in our view, we see the room for further monetary easing as very limited. The increasing violent labour protests and strikes seem to be weighing more and more on investors' perception of South Africa's creditworthiness.

The rand has been under strong selling pressure this week, mainly on the back of negative newsflow regarding another violent riot. Furthermore, the risk of further rand weakness is quite high. Hence, given the risks to the rand posing clear upside risks to inflation and the widening of the current account deficit, we believe the door for further monetary easing has been closed. We therefore expect the SARB to remain on hold throughout 2013.

Assessment and outlook
The statement was overall fairly balanced or perhaps skewed somewhat on the dovish side. Nonetheless, that the decision was unanimous and the MPC did not discuss a further rate cut means that the MPC finds current interest rate setting appropriate in the current environment.

The Governor Gill Marcus expressed worries about the growth prospects for the South African economy, with the mining and farm labour protests posing clear downside risks to the South African economy. While the economy remains fragile, the inflation outlook is squeezed on the upside. The SARB seems to be clearly concerned about wage settlements and the possibility of a "wage-price spiral," which together with the rand represents the main upside inflation risk.

Even though the statement from the SARB today was perhaps squeezed slightly more on the dovish side in our view, we see the room for further monetary easing as very limited. The increasing violent labour protests and strikes seem to be weighing more and more on investors’ perceptions of South Africa’s creditworthiness. The rand has been under strong selling pressure this week, mainly on the back of negative newsflow regarding another violent riot.

Furthermore, the risk of further rand weakness is quite high. Hence, given the risks to the rand posing clear upside risks to inflation and the widening of the current account deficit, we believe the door for further monetary easing has been closed. We therefore expect the SARB to remain on hold throughout 2013.

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