South Africa Holds Repo Rate At 7%

The South African Reserve Bank kept its benchmark repo rate on hold at 7 percent at its May 25th 2017 meeting, in line with market expectations. Policymakers said that although the inflation outlook has improved over the near term, the longer-term forecast is unchanged, remaining close to the upper limit of the target range. In addition, the rand and domestic bond yields benefited from increased global capital inflows to emerging markets which largely offset the impact of the sovereign credit ratings downgrade. However, with further ratings decisions imminent, risks remain for a further depreciation against the backdrop of continued global and domestic political uncertainty. Also, domestic growth prospects have deteriorated. The central bank revised down inflation and growth forecasts for this year.
SARB | Joana Taborda | 5/25/2017 1:47:54 PM
Excerpts from the statement by Governor Lesetja Kganyago:

The inflation forecast of the Bank has improved over the near term, but is unchanged in the outer quarters. In line with the previous forecast, headline consumer price inflation is expected to remain within the range for the rest of the forecast period. Inflation is expected to average 5.7% this year compared with 5.9% previously, while the forecast for 2018 has moderated by 0.1 percentage point to 5.3%. The forecast average for 2019 is unchanged at 5.5%.

The domestic growth outlook has deteriorated amid weak business and consumer confidence. The Bank’s forecast for GDP growth has been revised down for the entire forecast period, by 0.2 percentage points for 2017 and 2018, and by 0.3 percentage points in 2019. Annual growth rates of 1.0%, 1.5% and 1.7% for the forecast years are now expected. This downward revision is due in part to the expected impact of the sovereign credit ratings downgrade on domestic private sector gross fixed capital formation in particular. The downgrade is also likely to weigh on public sector investment through higher funding costs and more difficult access to funding. 

The rand remains a key upside risk to the forecast. The rand has, however, been surprisingly resilient in the face of recent domestic developments. This is partly due to offsetting factors, particularly positive sentiment towards emerging markets and the improved current account balance. The current level of the exchange rate, at below R13.00 against the dollar, is slightly stronger than at the time of the last meeting and stronger than that implicit in the starting point for the real exchange rate assumption. 

The outlook for the rand, and therefore the risks to the inflation outlook, will be highly sensitive to unfolding domestic political uncertainty, as well as decisions by the credit ratings agencies. The rand could weaken significantly in the event of a worst-case ratings downgrade scenario that could result in South African government bonds falling out of the global bond indices.

 South Africa Holds Repo Rate At 7%