South Africa Hikes Repo Rate to 7%


South African Reserve Bank raised its benchmark repo rate by 25bps to 7 percent on March 17th, its third straight hike, as policymakers voiced concern about growing inflation pressure despite a worsening growth outlook. Previous rate hikes have not prevented a rise in inflation, which in January reached a 17-month high of 6.2 percent, above its target of 3-6 percent. Three members of the rate-setting committee supported the decision.

Excerpts from the statement issued by Lesetja Kganyago:

Since the previous meeting of the Monetary Policy Committee, headline inflation has exceeded the upper end of the target range as pressures from higher food prices in particular have intensified. Although the longer-term inflation outlook has improved somewhat, inflation is still expected to remain outside the target range for an extended period, and upside risks remain. The domestic economic growth prospects remain fragile following a fairly broad-based weakening in the final quarter of last year, while global economic prospects remain uncertain.

The MPC is cognisant of the fact that demand pressures on inflation remain subdued, and indications are that household consumption expenditure is likely to remain constrained. Nevertheless the recent increase in core inflation and its expected upward trend is indicative of broader inflation pressures and possible second-round effects from supply side shocks. While the evolution of inflation expectations is critical in this regard, at this stage there is no clear evidence of a deterioration in longer-term inflation expectations, but they remain at an elevated level.

The Committee remains concerned about the weak growth outlook amid negative business and consumer confidence. The growth challenges facing the economy are compounded by the deteriorating outlook for global growth. The committee assesses the risk to the growth outlook to be on the downside. 

Given the upside risks to the inflation forecast and the protracted period of the expected breach, the MPC decided that further tightening was required to complement the previous moves. Accordingly, the MPC decided to increase the repurchase rate by 25 basis points to 7,00 per cent per annum, effective from 18 March 2016. Three members favoured a 25 basis point increase while three members preferred no change. Ultimately the committee decided on an increase. 

The Committee faced the continuing dilemma of a deteriorating inflation environment and a worsening growth outlook. The MPC remains sensitive to the possible negative effects of policy tightening on cyclical growth, but will remain focused on its mandate of maintaining price stability.

South Africa Hikes Repo Rate to 7%


South African Reserve Bank | Joana Ferreira | joana.ferreira@tradingeconomics.com
3/17/2016 1:52:56 PM