PRETORIA (Reuters) - South Africa's Reserve Bank left its benchmark repo rate unchanged at 7.0 percent on Thursday, saying that long term moderation of inflation pressures left the bank room to pause in its tightening cycle.
Stanlib's Chief Economist, Kevin Lings issued the following statement following the central bank's decision:
The South African Reserve Bank opted to leave the Repo rate unchanged at 7.00% at its MPC meeting today. This was in-line with market expectations (STANLIB also expected no change in rates). The Reserve Bank last adjusted interest rates in March 2016, when they increased rates by 25bps.According to the MPC statement, the decision to keep rates unchanged was not unanimous with one MPC member voting to a 25bps rate increase.
In terms of inflation, the Reserve Bank indicated that they remained concerned about inflation becoming entrenched above the inflation target, with the risks assessed to be on the upside. Key points from the MPC included:
- The latest inflation forecast of the Bank shows a moderate near-term deterioration compared with the previous forecast, but there is some improvement in the medium term outlook.
- The breach of the upper end of the target range, while still protracted, is now slightly shorter, with inflation expected to fall within the range during the third quarter of 2017.
- Inflation is now expected to average 6.7% in 2016 compared with 6.6% previously. In 2017 and 2018 inflation is expected to average 6.2% and 5.4%, marginally down from the previous forecast.
- Global inflation pressures remain benign, with low energy prices still having an impact, although this effect is likely to dissipate with the recent upward trend in oil prices.
In terms of the growth outlookthe Bank highlighted that while there are signs that the economy may be reaching the low point in the growth cycle, the recovery is expected to be slow with downside risks. Key points from the MPC included:
- Recent high-frequency data paint a particularly bleak picture of the first quarter of this year, following a sharp contraction in mining output, minimal growth in the manufacturing sector, and declines in electricity production and consumption.
- The Bank’s GDP growth forecast for 2016 was revised down from 0.8% to 0.6%. While a recovery is still expected in the next two years, the forecasts for both these years have been revised down by 0.1 percentage point to 1.3% and 1.7%.
- With the estimates of potential output unchanged, the output gap is expected to widen over the forecast period.
- The Bank’s leading indicator of economic activity continued its downward trajectory in February, consistent with the constrained outlook.
- The risks to the growth outlook are assessed to be on the downside, particularly in the short term, despite the downward revision to the forecast.
Overall, it is very clear that the Reserve Bank remains concerned that inflation will remain well above the upper end of the target for a protracted period and then become entrenched at a higher average level. In making their latest interest rate decision the Bank made it clear that the increase in the repo rate at the previous MPC meetings has contributed to the improvement in the longer-term inflation forecast, which means the Bank can afford to hold rates steady in the near-term. We think that the Reserve Bank’s decision to keep rates on hold at the May meeting was appropriate, but that the SA Reserve Bank will continue to increase interest rates in the second half of 2016. At this stage we expect the Repo rate to end 2016 somewhat higher at 7.50%.