Weak economy allows Reserve Bank to keep repo rate at 7%

The Reserve Bank kept its benchmark repo rate unchanged at 7% yesterday, saying that while it was still concerned about inflation, the weak economy had provided some room to delay further policy tightening.

“The MPC [monetary policy committee] is aware that some of the favourable factors that contributed to this decision could reverse quickly,” governor Lesetja Kganyago said.

“It remains ready to respond appropriately to any significant change in the inflation outlook.

Although inflation is running higher than the bank’s 3%-to6% target – the consumer price index (CPI) rose 6.3% last month, Wednesday’s report showed – the outlook for economic growth has weakened.

The bank now expected CPI inflation to average 6.6% this year, Kganyago said yesterday, from an earlier forecast of 6.7%, while the forecast for next year was revised to 6% from 6.2% and for 2018 to 5.5% from 5.2%.

The bank now sees inflation peaking at 7.1% in the fourth quarter this year.

Food inflation is expected to peak at 12%, also in the fourth quarter.

The economy contracted 1.2% in the first quarter, and the International Monetary Fund’s latest projections for the year put growth at just 0.1%.

Yesterday, the bank revised its projection for growth this year to 0% from 0.6%.

It puts growth next year at 1.1%, from a previous 1.3% forecast, and the 2018 outlook is for 1.5% growth (1.7% before).

The economy’s sluggishness is one of the main concerns of international rating agencies, which will review their ratings of South Africa again at the end of the year.

All 16 of the economists surveyed by Business Day had expected rates to be left unchanged yesterday.

A stronger rand – it has strengthened to well below R15/$1 – and prospects for stabilising or falling global interest rates had also supported their expectations.

Yesterday’s decision left the repo rate unchanged at 7%.

The bank has raised rates by 75 basis points since the start of the year, and by 200 since January 2014.

The last increase was 25 basis points in March, and followed a 50-point hike in January. In its annual report last month, the bank warned that further increases this year could likely not be avoided.

“As most measures of underlying inflation and inflation expectations are already close to the top end of the inflation target range, there is little space to defer a policy response,” the bank’s management said in that report.

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