Identifier
Created
Classification
Origin
05PRETORIA4215
2005-10-18 09:19:00
UNCLASSIFIED
Embassy Pretoria
Cable title:  

South Africa: SARB Leaves Interest Rates Alone

Tags:  ECON EINV EFIN ETRD BEXP KTDB PGOV SF 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 PRETORIA 004215 

SIPDIS

DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND
TREASURY FOR OAISA/JRALYEA/BCUSHMAN
USTR FOR PCOLEMAN


E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: South Africa: SARB Leaves Interest Rates Alone


UNCLAS SECTION 01 OF 02 PRETORIA 004215

SIPDIS

DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA
USDOC FOR 4510/ITA/MAC/AME/OA/JDIEMOND
TREASURY FOR OAISA/JRALYEA/BCUSHMAN
USTR FOR PCOLEMAN


E.O. 12958: N/A
TAGS: ECON EINV EFIN ETRD BEXP KTDB PGOV SF
SUBJECT: South Africa: SARB Leaves Interest Rates Alone



1. (U) Summary. Citing high oil prices, rising inflationary
expectations, and higher global inflation as increasing the
risk of inflation in South Africa, the South African Reserve
Bank (SARB) decided to leave interest rates unchanged at its
October 12-13 meeting of the Monetary Policy Committee
(MPC). Although the impact of substantially higher fuel
costs has not yet translated into higher prices for other
goods and services, the SARB felt that the prospect of even
higher oil prices did pose significant inflationary risk.
The SARB also cited the Bureau of Economic Research's latest
survey indicating that inflationary expectations had risen.
The SARB expects inflation to remain below the 6% ceiling,
but now believes that inflation will peak at a level just
below 6% sometime during the first two quarters of 2006.
Real interest rate differentials with the United States
remain relatively high. End Summary.

Staying the Course
--------------


2. (U) Citing high oil prices, rising inflationary
expectations, and higher global inflation as increasing the
risk of inflation in South Africa, the South African Reserve
Bank (SARB) decided to leave interest rates unchanged at its
October 12-13 meeting of the Monetary Policy Committee
(MPC). Although the impact of substantially higher fuel
costs has not yet translated into higher prices for other
goods and services, the SARB felt that the prospect of even
higher international oil prices continued to pose a
significant inflationary risk to the South African economy.
In August, consumer prices minus mortgage costs (CPIX)
increased by 4.8%. If fuel costs were excluded, CPIX would
have increased by 3.6% -- the same as in July. For the
previous 12 months, CPIX excluding fuel costs has averaged
3.4%, indicating that there has been limited pass-through of
higher fuel costs to the domestic prices of other South

African goods and services. The decision means that the
repurchase rate remains at 7%. Prime lending rates have
stayed at 10.5%.

Inflationary Expectations
--------------


3. (U) Of particular note was that the SARB has adjusted its
inflation forecast upwards since the MPC's last public
pronouncement in August. While the SARB still expects
inflation to stay within its 3-6% target range, it now
predicts that inflation will peak just below 6% sometime
during the first two quarters of 2006. In the MPC's August
report, the SARB forecasted that inflation would peak at
5.3%. The adjustment is supported by an upward trend in
producer prices. In May 2005, producer prices increased
2.4% but in August they rose 4.2%. Trends in consumer
prices generally follow those in producer prices.


4. The adjustment is also supported by the latest inflation
expectations survey conducted by the Bureau for Economic
Research (BER) at the University of Stellenbosch. The BER
survey now predicts CPIX inflation to rise 5.2% in 2006 and
5.4% in 2007, as compared to 4.9% and 5%, respectively, in
its last survey.

Domestic Demand Still Strong
--------------


5. (U) Domestic demand, which has been the primary driver of
growth in the South African economy during the past year,
remains robust, albeit showing signs of moderation. Retail
sales grew by 3.2% in July. New vehicle sales increased by
26.5% in September. Much of the increase in consumer demand
has been financed by increased borrowing stimulated by
historically low interest rates. Both money supply and
credit demand grew by 19% and 18.3% in August. Rising
disposable income and relatively low interest rates have
supported increased household borrowing. Household debt as
a percentage of disposable income rose from 60% in the first
quarter 2005 to 62% in the second. However, relatively
lower interest rates have meant that debt service as a
percentage of disposable income has remained unchanged at
6.5%.


6. (U) Strong retail sales and falling inventories have
helped manufacturing production rebound 3.5% in the second
quarter 2005, after a decline in the first quarter. This
also translated into more manufacturing jobs. Formal non-
agricultural employment increased 7.6% (q/q),representing a
gain of 84,000 jobs in the second quarter 2005.

Real Interest Rate Differential Still High
--------------


7. (U) South African real short term interest rates are
still relatively high when compared to those in the U.S.
The real repurchase rate is 3.1% while the real federal
funds rate is only 0.15% (i.e., federal funds rate at 3.75
and U.S. CPI inflation at 3.6%). The size of this
differential keeps the rand an attractive investment and
supports its value against the dollar. In turn, the strong
rand has helped to mitigate the rising cost of imported oil.
This may be coming to an end. In recent months, the rand
has weakened slightly, and it weakened a bit more after the
MPC announcement to R6.62 to the dollar (at 3 p.m. EST on
October 13),as compared to 6.54 on October 12.

Comment
--------------


8. (U) The MPC decision to leave the repurchase rate alone
was no surprise to economists and market analysts. That the
foreign exchange market reacted with a slight drop in the
value of the rand would seem to support the MPC's decision
not to lower interest rates in the face of inflationary
expectations. Economists expect the SARB to increase
interest rates once higher oil prices propel inflation via
energy-intensive industries. Rising inflation could get in
the way of the SAG economic agenda to ratchet growth to 6%
by 2014. How the SARB manages interest rates to control
inflation will be crucial to the SAG's pursuit of its growth
agenda. TEITELBAUM