South Africa maintains repurchase rate at 6˝% as inflation risks drop

By Tali Rackner

Minneapolis, May 24 – The Monetary Policy Committee of the South African Reserve Bank (SARB) unanimously decided to keep its repurchase rate at 6˝% at a meeting held on Thursday.

The committee said that since its previous meeting, the rand has depreciated significantly, against the U.S. dollar in particular, reversing a lot of the overvaluation seen at that time.

Since then, the rand has depreciated by 6% against the dollar, by 0.7% against the euro and by 2.8% on a trade-weighted basis.

“The main driver of this recent rand weakness has been developments in the U.S. financial markets, where Treasury yields exceeded 3% for the first time since July 2011,” the committee said in a notice.

“This was in response to wider fiscal deficits, rising inflation expectations and expectations of further U.S. monetary policy tightening – a key risk highlighted in the previous MPC statement.

“As a consequence, a number of emerging markets have experienced capital outflows and currency depreciation, with those with wider current account deficits and other macroeconomic imbalances being most vulnerable.”

The year-on-year inflation rate, as measured by the consumer price index for all urban areas, reached a seven-year low of 3.8% in March before increasing to 4.5% in April, as the impact of the value-added tax (VAT) increase and other levies became evident.

The headline inflation forecast is more or less unchanged since the committee’s last meeting. The forecasts for 2018 and 2019 are unchanged at 4.9% and 5.2%, respectively, while the forecast for 2020 is marginally higher at 5.2% compared with 5.1% previously. The peak of 5.5% is still expected in the first quarter of 2019 before the impact of the VAT increase largely dissipates.

The year-on-year inflation rate, as measured by the consumer price index for all urban areas, also reaching a seven-year low, was 3.8% in March before increasing to 4.5% in April.

“The growth forecast has improved moderately, mainly for 2019, but remains too low to make serious inroads into the unemployment rate,” the notice said.

“The risks to the forecast remain on the upside, but slightly less so than at the previous MPC meeting.

“The weak first-quarter growth outcome is not expected to derail the upward trend and does not yet reflect the renewed business and consumer optimism.

“Despite the stronger expected trend in household consumption expenditure, there is still evidence of slack in the economy, and demand pressures in the economy are not assessed to pose a risk to the inflation outlook.”

© 2015 Prospect News.
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