Thursday, 30 March 2017 18:38

Repo rate left unchanged at 7%

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The Reserve Bank has decided to keep the repo rate unchanged at 7% per annum, Reserve Bank Governor Lesetja Kganyago said on Thursday.

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“The MPC [Monetary Policy Committee] has decided to keep the repurchase rate unchanged at 7% per annum. The MPC is of the view that we may have reached the end of the tightening cycle,” said Kganyago following the MPC’s second meeting of the year.

Five members of the MPC preferred an unchanged stance, while one member of the MPC preferred a 25% basis point reduction.

The decision comes as Nedbank economists had predicted that the bank would keep rates unchanged.

“However, we still anticipate that the committee will remain cautious, and keep the interest rate unchanged until the second half of the year when the next move is likely to be down provided the rand holds up,” said Nedbank earlier this week.

The Reserve Bank said its forecast for inflation has improved with headline inflation now expected to return to within the target range in the second quarter of 2017. The Consumer Price Index (CPI) inflation is expected to average 5.9% for the year compared with 6.2% in the previous forecast.

The forecast for 2018 has moderated from an average of 5.5% to 5.4%.

The forecast for core inflation is marginally lower than before at an average of 5.4% in 2017, and unchanged at 5.2% in 2018. An average core inflation of 5.3% is expected in 2019.

The central bank noted that the rand has for the past few months been resilient along with a number of other emerging market currencies.

“While most measures of emerging market risk have narrowed over recent months, those for South Africa have widened again over the past few days. The rand has depreciated significantly in response to increased domestic political uncertainty and the exchange rate has re-emerged as an upside risk to the inflation outlook.”

Since the previous MPC meeting in January, the rand has appreciated by 3.9% against the US dollar, by 4% against the euro and by 3.4% on a trade-weighted basis.

While the domestic growth outlook remains week following negative Gross Domestic Product (GDP) growth in the fourth quarter of 2016, a mild recovery is expected.

“The 2016 annual GDP growth of 0.3% is likely to have been the low point of the growth cycle, and a mild recovery is expected over the forecast period. The Bank’s forecast for GDP growth has been revised up by 0.1% in both 2017 and 2018, to 1.2% and 1.7%, with growth of 2.0% forecast for 2019,” said Kganyago.

While growth is still expected to be below estimated potential output growth of around 1.4% in the near term, the output gap is expected to narrow.

Net exports and a positive albeit weak, household consumption expenditure growth are expected to be the main drivers of growth.

When coming to the petrol price, international oil prices have declined following increased oil inventories and weak compliance with the OPEC-brokered deal to restrict output, and an increase in shale gas production in the US.

“Although Brent crude oil prices increased by about 10% in the wake of this agreement, these gains have been largely reversed, with oil prices back in the region of US$50 per barrel for the past three weeks. The impact on the domestic petrol price will be evident in April when a reduction is expected, despite the 39 cent increase in the Road Accident Fund and fuel levies provided for in the February budget,” said Kganyago.

Last modified on Thursday, 30 March 2017 18:49

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