May
23

SA RESERVE BANK KEEPS REPO RATE ON HOLD AT 7%

‘Inflation expectations remain at uncomfortably high levels.’Repo Rate

PRETORIA – The South African Reserve Bank (Sarb) has elected to keep the repo rate unchanged “for now” at 7% per annum, Sarb governor, Lesetja Kganyago announced on Thursday.

Five members of the Sarb’s Monetary Policy Committee (MPC) elected for ‘no change’ in the repo rate, with one voting for a 25 basis point increase, he noted.

Despite some improvement in the medium-term inflation outlook, Kganyago said the MPC remains concerned about the extended breach of the Bank’s 3-6% target range, with risks assessed to be on the upside.

Inflation is expected to fall within the target range for the first time during the third quarter of 2017.

While year-on-year consumer price inflation (CPI) moderated slightly in April, food price pressures continue “unabated”, Kganyago highlighted, with food and non-alcoholic beverages inflation accelerating to 11% in April, up from 9.5% in March.

Food inflation is expected to peak at 12% in the final quarter.

Core inflation, which excludes food and fuel, measured 5.5% in April, down from 6.4% in March.

Inflation is expected to average 6.7% in 2016, compared with 6.6% previously, while core inflation is expected to average 5.9%, compared with 6.2% previously.

Lower exchange-rate pass-through as well as lower electricity price inflation will be countered to some extent by higher near term food price forecasts and upward inflation in the international oil price, Kganyago said.

The risks to South Africa’s economic growth outlook are expected to be on the downside, with mining and manufacturing figures expected to weigh on first quarter growth numbers, the governor noted.

Constrained household spending, reflected in subdued retail sales, is indicative of a lack of demand pressure in the economy, Kganyago said.

Sub-Saharan Africa has seen a consistent deterioration in its growth outlook and is expected to underperform the global economy in 2016 for the first time in 16 years, as the effects of lower commodity prices take their toll.

The weak rand, which resumed its weakening path following a few weeks of strength, continues to pose upside risks to the inflation outlook, Kganyago said.

“Pass through remains subdued but there are indications that this may be increased,” Kganyago said, with risks of earlier-than-expected monetary policy tightening in the US also on the Reserve Bank’s radar.

“More recently, heightened political uncertainty has impacted negatively on the currency,” Kganyago said.

In line with other emerging markets, South Africa has seen strong equity outflows. Since the beginning of the year, non-residents have been net sellers of local equities to the tune of R56 billion.

They have been net purchasers of government bonds, however, with purchases amounting to R23 billion year-to-date. “Although the past two weeks has seen net sales,” Kganyago said.

The bank has revised its GDP growth forecast for 2016 down from 0.8% to 0.6%, followed by growth of 1.3% and 1.7% in 2017 and 2018, respectively.

“The MPC remains focused on its inflation mandate but sensitive to the state of the economy,” Kganyago said.

 Article by
Money Webb