The South African Reserve Bank kept its benchmark repo rate on hold at 7 percent at its March 30th meeting, in line with expectations. Policymakers said the inflation outlook has improved although the exchange rate became a risk due to recent political uncertainties. Yet, policymakers added that the end of the tightening cycle has been reached.
Excerpts from the statement issued by Lesetja Kganyago:
The inflation forecast of the Bank has improved, reversing most of the deterioration seen at the previous meeting of the MPC. Headline inflation is now expected to return to within the target range during the second quarter of 2017 compared with the fourth quarter previously, and to remain within the range for the rest of the forecast period. CPI inflation is expected to average 5.9% for the year, compared with 6.2% in the previous forecast, while the forecast for 2018 has moderated from an average of 5.5% to 5.4%. The forecast period has been extended to 2019, with an expected average of 5.5% for the year.
This improvement is mainly due to a more appreciated exchange rate assumption. Despite the recent depreciation, the current level of the rand is still consistent with the exchange rate assumption in the forecast. Although the international oil price 3 assumption remains unchanged, the exchange rate is expected to lead to lower petrol price inflation, and is reflected in a downward revision to the assumption for administered prices. 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 domestic growth outlook remains weak following the negative growth recorded in the fourth quarter of 2016. 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 6 percentage points in both 2017 and 2018, to 1.2% and 1.7%, with growth of 2.0% forecast for 2019.
Since the previous MPC meeting the inflation outlook has improved. However, the risk to the inflation forecast has been affected by the reaction of the exchange rate to the current elevated levels of political uncertainty. At current levels of around R13.00 against the US dollar, the exchange rate is still moderately stronger than the level implied in the exchange rate assumption in the forecast. However, the rand is likely to react further to unfolding developments until a greater degree of certainty and confidence is restored.
The MPC is of the view that we may have reached the end of the tightening cycle. However the Committee would like to see a more sustained improvement in the inflation outlook before reducing rates. This assessment may however change if the inflation outlook and the risks to the outlook deteriorate.
3/30/2017 2:41:53 PM