Johannesburg, 23 November 2017 – The Steel and Engineering Industries Federation of Southern Africa (SEIFSA) welcomes the sensible decision by the South African Reserve Bank (SARB) to leave the repo rate unchanged at 6.75% per annum.
Chief Economist Dr Michael Ade said this was particularly critical given the need for South Africa to be extra-cautious of the exchange rate risk which may arise after ratings agencies make a decision on the country’s sovereign credit ratings tomorrow.
“The SARB’s failure to cut interest rates in today’s sitting is a huge disappointment for embattled and over-indebted consumers. This is bleak news for consumers who would have preferred to start the festive season in a buoyant mood, with some spare spending money. However, the decision is comprehensible given the existence of upside risks to inflation outlook, which have certainly heightened.” Dr Ade said.
He pointed out that the weaker exchange rate (especially the Rand/US Dollar exchange rate), in addition to increasing international oil prices, has led to a higher contribution to the basic fuel price on petrol, diesel and illuminating paraffin. He said the situation is exacerbated by a potential increase in electricity prices in April 2018 and tomorrow’s credit ratings agency updates.
Dr Ade said after having increased consecutively from 4.6 percent in July 2017 to 5.1 percent in September 2017, the annual headline consumer price inflation had recently dipped to 4.8% in October 2017. Correspondingly, the CPI had increased by 0.3 percent month on month in October 2017, leading to a cumulative annual increase of 4.1% from January 2017 to October 2017. He said that, since inflation is still within the SARB’s target band, the Bank was expected to lower the repurchase rate by 25 basis points going into the festive season, thus leading to a corresponding reduction in the prime lending rate.
He said a rate cut would have helped not only to reduce borrowing costs for embattled consumers and stagnating businesses, but also to provide a much-needed injection into the economy.
“The present scenario of low growth, volatile production levels, declining productivity and low consumer and business confidence does not provide comfort to both direct and anchor investors,” he said.
Dr Ade added that while real GDP growth in the third quarter may be better than expected, it may not be underpinned by significant contribution from key industrial sectors such as the mining, the metals and engineering sectors, as well as the rest of the manufacturing and utilities sectors. He said the SARB had missed an opportunity to pursue an expansionary monetary policy stance aimed at broadly stimulating growth, including in the industrial sectors, and improving on the negative output gap, given the continuous existence of downside risks to the growth outlook.
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