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SA Reserve Bank Keeps Interest Rates Unchanged At 6.75%


SA Reserve Bank Keeps Interest Rates Unchanged At 6.75%

On Thursday, and as expected, the Reserve Bank's monetary policy committee (MPC) kept interest rates unchanged at 6.75%.

All 22 economists polled by Bloomberg expected the repo rate to remain unchanged despite lower inflation and a weaker economic outlook - with expectations that the economy contracted in the first quarter of the year.

The Bank adopted a more dovish stance in their statement, indicating that there may room for interest rate cuts this year. "Average inflation expectations have been declining slowly since the end of 2017," Bank governor Lesetja Kganyago said.

Inflation is expected to moderate this year and the Bank has made it clear it would prefer inflation anchored at the mid-point of its 3%-6% inflation target range. In April, inflation was below the mid-point of the target range at 4.4%.

The Bank now expects inflation to average 4.5% this year, down from March's projection of 4.8%, 5.1% in 2019 from 5.3%, and 4.6% in 2021 from 4.7%.

"Recent monthly inflation outcomes have remained around the mid-point of the inflation target range, in part due to weak demand and positive inflation surprises. The medium-term inflation outlook has moderated slightly," Kganyago said. 

The Bank highlighted the risks to growth as first quarter GDP looks set to contract based on weak performances in mining, manufacturing and retail. "Domestically, electricity supply constraints and protracted strike in a major gold mine contributed to a weak first-quarter performance," he said.

While global growth has rebounded, the Bank warned that downside risks remain "in particular from threats to the global trade regime".

The Bank revised down its growth forecast for this year to 1% from 1.3% while the forecasts for 2020 and 2021 remain unchanged at 1.8% and 2%, respectively.

"The rand has benefited from improved sentiment towards riskier assets but will continue to be affected by idiosyncratic factors, such as domestic growth prospects and policy settings," Kganyago said.

In November, the MPC increased interest rates for the first time in two years by 25 basis points in response to long-term risks to inflation, including tighter financial conditions such as interest rate hikes in the US, a weaker exchange rate, a high wage rate, oil prices and rising electricity and water tariffs.

It was announced on Thursday that Christopher Loewald, the Bank's head of policy development and research, will be a member of the MPC.

This follows the retirement of Brian Kahn last year and the resignation of Francois Groepe earlier this year, which left the MPC two members short.

Inflation forecasts:

- 2019: 4.5% from 4.8% 

- 2020: 5.1% from 5.3% 

- 2021: 4.6% from 4.7% 

Inflation is now expected to peak at 5.5% in the first quarter of 2020.

Growth forecasts:

- 2019: 1% from 1.3% 

- 2020: Unchanged at 1.8%

- 2021: Unchanged at 2%​ 

Author Business Live
Published 23 May 2019 / Views -
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