South Africa Keeps Key Rate Unchanged at 7%


The South African Reserve Bank left its benchmark repo rate on hold at 7 percent at its November of 2016 meeting, as widely expected. Policymakers said growth in the third quarter is expected to be positive, but below the level of June quarter, while left the GDP forecasts unchanged from September. The inflation reached to an 8-month high in October, after food prices picked up the most since 2009 due to severe drought, but it is expected to moderate in early 2017. The bank also noted the rand will be sensitive to changes in the stance of the US monetary policy.

Excerpts from the statement issued by Lesetja Kganyago:

The domestic economic growth outlook remains subdued, although the low point of the cycle appears to be behind us. The Bank’s forecast  remains unchanged at 0.4 percent for 2016, and 1.2 percent and 1.6 percent for the next two years. While the estimate for  potential GDP growth was revised down marginally to 1.3 percent, and rising to 1.5 percent by 2018, the output gap is expected to remain negative over the forecast period. The Bank’s composite leading business cycle indicator improved in August and September, continuing a recent generally positive but gradual upward trend.

Slow growth in household disposable incomes is also reflected in a gradual decline in wage growth, with growth in nominal remuneration per worker declining to 5.8 percent in the second quarter. When an adjustment is made for the increase in labour productivity, growth over four quarters in nominal unit labour costs measured 5.1 percent in the second quarter. The Andrew Levy Employment Publications Survey reports an average wage settlement rate in collective bargaining agreements of 7.5 percent in the first three quarters of the year, and 7.1 percent in the third quarter. This may be indicative of wage settlements becoming more sensitive to the persistently high unemployment rates.

Food price inflation remains a significant driver of inflation, and is sensitive to the continuing drought. While food price inflation is still expected to moderate from early 2017, the pace of decline is expected to be slower than previously forecast. This has led to an upward revision to the food price assumption in the forecast during the outer quarters in particular. The change is mainly due to the delayed impact of meat prices which are now expected to peak only in early 2018, as farmers rebuild their herds during 2017.

The MPC is of the view that a high degree of uncertainty surrounds the nature and timing of possible policy changes emanating from significant developments in the global economic environment. This elevated uncertainty creates a more challenging environment  especially for emerging markets as evidenced in the recent changed pattern of capital flows. Financial markets are thus likely to remain volatile for some time.

Since the previous meeting of the MPC the inflation forecast has remained largely unchanged. Whereas the risks to the inflation forecast were previously assessed to be more or less balanced, the Committee now assesses the risks to be moderately to the upside. This is mainly due to the possible impact of adverse global  developments on the exchange rate. The risk of domestically generated shocks to the exchange rate also remain. Nevertheless, despite its high degree of volatility, the rand has displayed relative resilience in the face of numerous shocks over the past year.

The MPC has accordingly decided to keep the repurchase rate unchanged at 7,0 per cent per annum. The decision was unanimous. The MPC remains concerned that the inflation trajectory is  uncomfortably close to the upper end of the target range.  Furthermore, the uncertain environment and moderately higher risks to the inflation outlook require continued vigilance. While the Committee retains the view that we may be close to the end of the hiking cycle, there may be a reassessment of this position should the upside risks transpire. 

South Africa Keeps Key Rate Unchanged at 7%


Mojdeh | mojdeh@tradingeconomics.com
11/24/2016 1:56:27 PM