Reserve Bank governor Lesetja Kganyago on Tuesday announced, at the end of the first Monetary Policy Committee meeting of the year, the committee had kept the repo rate at 7 percent.
Saying that the bank considered SA could be at the end of the rate hike cycle, he said the bank was keeping an eye on the situation and its outlook could change.
Kganyago noted in his speech that global inflation was a risk, and although the rand was trading in a stable range currently, China's growth – projected at 6 percent – meant there was a chance of a global credit bubble. He also noted this was helped by the fact that SA escaped a downgrade to junk last year, although this remained a threat.
Economic growth is also under pressure, although SA should grow at 1.1 percent this year and 1.6 percent in 2018, which is below potential, he said. Kganyago also pointed to low business confidence, even though commodities are rebounding, as well as a low level of gross fixed capital investment. This, he says, contributes to persistent labour market weakness.
Kganyago also noted that unemployment was at more than 26 percent, the highest level since 1997, wage growth in real terms was growing slowly, while people were spending more. He also noted consumers are under pressure, and confidence is low. Growth in credit extension to the private sector is subdued, but that to the private sector is growing, he added.
On the bright side, good rains mean that food prices should moderate. However, meat farm restocking means this category will lag others. Food price inflation should average 7 percent compared with 6.6 percent previously. A rising trend in global food prices and fuel prices locally - with another increase expected - would impact the price of food, he notes.
Kganyago said the long-term trajectory for inflation was unchanged and risks are moderately on the upside.
The decision comes as inflation hit a 10-month high of 6.8 percent in December as the cost of food surged. This was up from the November figure of 6.6 percent. Inflation should return to the target range in the last quarter of 2017, Kganyago says.This is as oil stabilises.
The Reserve Bank has a target of 3-6 percent for inflation, but also has to keep an eye on economic growth.
South Africa will have been lucky to hit 0.5 percent gross domestic product growth last year, while the International Monetary Fund is predicting 0.8 percent for this year.
Investec on Tuesday said in a note it was likely that the repo rate would remain on hold in January amid lingering weakness in economic activity and prospects of receding inflation in 2017.
Earlier on Tuesday, Jawitz Properties CEO Herschel Jawitz anticipated the rates being kept on hold. He noted this would be “a welcome boost to consumer confidence which sits at almost historically low levels”.
Consumer confidence slumped in the fourth quarter of last year after election euphoria faded.
This comes after the FNB/BER Consumer Confidence Index rebounded from -11 index points in the second quarter of last year to -3 in the third.
It then sagged back to -10 in the fourth quarter.
Jawitz says “uncertainty of any kind is not good for the country and at a time when the political noise and uncertainty has somewhat settled from a bad 2016, stability of interest rate policy and rates is important".
Consumer confidence
Last week, Jason Muscat, senior economic analyst at FNB, said "positive economic developments such as an appreciation in the rand exchange rate, a welcome (R1.17) drop in the petrol price and a modest recovery in job creation supported the purchasing power and confidence levels of consumers during the third quarter of 2016.
“The peaceful, free and fair completion of the municipal elections in early August, as well as the final outcome, may also have raised the confidence levels - or expectations for the future - of some consumers.
“However, the election boost to confidence likely faded during the fourth quarter, and the economic realities of weak household income growth, poor credit extension and soaring food prices once again exerted downward pressure during the festive season."
In addition, the petrol price increased by 88 cents per litre between September and November, although there was slight relief of 20 cents per litre announced on 7 December. The JSE All Share index, in turn, slumped from above 53 000 index points in the first half of September to below 50 000 in the first week of December, which may have weighed on the confidence levels of affluent consumers.
There were also a number of political developments that had the potential to suppress the confidence of some consumers during the fourth quarter, including the NPA's decision to charge Finance Minister Pravin Gordhan with fraud in October 2016, the high court application by President Jacob Zuma to stop the publication of the public protector’s state capture report and the election of Donald Trump as the next president of the US, said FNB.
Jawitz notes, if consumers have a sense that interest rates will remain stable for the foreseeable future, the caution that we have seen from buyers may start to ease. Jawitz says that even if rates are left on hold, property price growth and sales volumes will remain subdued in 2017.
On Monday, S&P Global Ratings predicted muted nominal house price growth of 5.5 percent in South Africa for this year. This implies stagnation in home prices in real terms.
The ratings agency has forecast nominal house price growth of 6.5 percent next year.
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