Repo Rate Firm

The Reserve Bank on Thursday kept the repo rate unchanged at 7% – in line with market expectations.

Briefing reporters following the Monetary Policy Committee [MPC] meeting, Reserve Bank Governor Lesetja Kganyago said the decision to keep the repo rate unchanged was unanimous.

“The MPC has unanimously decided to keep the repurchase rate unchanged at 7%. The MPC is aware that some of the favourable factors that contributed to this decision could reverse quickly and remains ready to react appropriately to any significant change in the inflation outlook,” said Kganyago.

This was the second time this year that the repo rate has remained the same.

Governor Kganyago said the latest inflation forecast of the bank shows a marginal improvement compared with the previous forecast, with inflation still expected to accelerate further this year. Inflation, said the bank, is only expected to return to within the target range of 3%-6% in the third quarter of 2017. Inflation is now expected to average 6.6% in 2016 and 6% in 2017.

Kganyago said the volatility experienced by the currency has mainly been driven by external factors and changes in global risk perceptions. While it has strengthened recently, it remains vulnerable to the possible risks in global scenarios, changes in US monetary policy expectations and domestic concerns, including the possibility of ratings downgrades later in the year.

The Reserve Bank warned that the domestic economic growth outlook remains challenging following the contraction in gross domestic product [GDP] in the first quarter of this year. Statistics South Africa announced in June that GDP contracted by 1.2% in the first quarter of 2016.

“The bank’s latest forecast is for zero percent growth in 2016, compared with 0.6 % previously,” said Governor Kganyago.

There are no clear signs of recovery in the agricultural sector, while food price inflation is expected to remain elevated. Market expectation was that given the pullback of the rand, the MPC will pause hiking up the rate.

“Our view is that the SARB will only raise rates by 25 basis points one more time later this year, but this will be dependent on developments in the currency,” said Nedbank economists earlier this week. – SAnews.gov.za