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S.Africa keeps interest rate steady as power cuts hit growth

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South africa- image source international.ucla.edu

South africa- image source international.ucla.edu

South Africa’s central bank held its key interest rate at 5.75 percent on Thursday, holding off a raise while the country grapples with electricity shortages that have slowed economic growth and a weak rand.

The governor of the South African Reserve Bank, Lesetja Kganyag, said at a press briefing in Pretoria that the repo rate would remain unchanged since July, as economists had predicted.

Infrastructure constraints are crippling growth in the country, as the state-owned power utility Eskom struggles with ageing power plants and introduces electricity price increases.

Kganyago emphasised the bank was still “in a tightening cycle”, saying “the deteriorating inflation outlook suggests that this unchanged stance cannot be maintained indefinitely.”

Inflation is predicted to rise to near the central bank’s six percent upper target range by the end of the year.

Eskom has implemented rolling blackouts across the country as it works to repair the apartheid-era power plants, leaving swathes of the country’s cities in darkness humming with the sound of generators.

“The main risks to the outlook remain electricity tariff increases, the exchange rate and wage settlements,” said Kganyago.

“Growth remains fragile, constrained by electricity shortages and low business confidence.”

Lower electricity capacity for the next couple of years has in part caused the bank to lower its GDP growth forecast for 2015 from 2.2 percent to 2.1 percent.

Kganyago has the unenviable task of balancing South Africa’s weak economy against a large current account deficit, hit by low commodity prices.

Kganyago cited salary growth in excess of inflation as another concern to the bank.

“Upside risks to inflation from wage pressures are still expected, with the resolved settlements in the coal and gold mining sectors of particular concern,” he said.

If the United States raises its interest rates later this year, analysts expect that South Africa will follow.

“I think by the time we get to November, that sort of period, fourth quarter, there’s a likelihood that they will move by another quarter point,” said Dennis Dykes, chief economist at Nedbank.

“I think holding is the right decision at the moment, obviously we’re balancing weak economic growth and rising inflation.

“Unless their hand is forced by the rising US interest rates, they should back off.”


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