It is true that at the last SARB monetary policy meeting, Governor Marcus very firmly indicated SA to be in a rising interest rate cycle.

At the same time it was made equally clear that any interest rate decisions will be taken opportunistically, depending on the moment in terms of economic data and any other considerations that may have a bearing.

Seeing that America has at least a five year rising interest rate cycle ahead of it, with the first such increase, like for the UK, probably some time next year, and with the ECB likely much delayed in its rate increasing cycle, there will still be plenty of time to apply the whip as and when needed.

But at this particularly juncture those stars refuse to line up.

Inflation may be bulging a bit this year above 6%, with possibly the worst reached within months after which renewed subsidence back into the 3%-6% target zone can be expected by early next year.

The Rand has not continued to weaken after reaching its worst level just after the January rate hike, but has since then in line with global market conditions steadily retraced its steps, firming from near 11.40:$ then to below 10.30:$ recently.

The global conditions responsible for this Rand pullback may, if anything, still strengthen in months ahead, as the US economy behaves modestly, US inflation keeps undershooting, the Fed remains inclined to act only very measuredly and markets are buying into this.

Also, the ECB will likely ease policy from next month.

As such the risk to our inflation and inflation expectations prospect has receded somewhat and may still do so some more in coming months, even if this is as yet not a consensus view.

Still, the immediate threat has eased, while the economy has continued to weaken in 1Q2014 across a broad swath of sectors (motor, retail, manufacturing, mining) with employment and household credit not going anywhere and business and consumer confidence firmly in negative territory.

The SARB leading indicators also continue to suggest growth stagnation.

Under the circumstances, the SARB can be expected to lower both its inflation and growth forecasts and to stand down on its interest rate decision as the circumstances prevailing now do not warrant another increase.

Decision: keep rates unchanged, prime staying at 9% and repo at 5.5%. It may not be an unanimous decision, as the committee seemingly likes to argue.
 
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website   www.bruggemans.co.za
Email  economics@bruggemans.co.za
Twitter   @ceesbruggemans
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