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Repo rate stays at 3.5%

But higher inflation fuels forecast of a hike later this year.
Lesetja Kganyago, governor of the South African Reserve Bank. Image: Moneyweb

South African Reserve Bank (Sarb) governor Lesetja Kganyago announced the repo rate will stay at 3.5% on Thursday, following the conclusion of the bank’s May Monetary Policy Committee (MPC) meeting.

The unanimous decision by the MPC is in-line with expectations of most economists and market commentators, despite the higher than expected Consumer Price Inflation (CPI) figure for April, which came out on Wednesday.

Read: Inflation spikes to 4.4% in April

A spike in crude oil prices since the last MPC decision in March has pushed South Africa’s petrol price to a record high and fuelled inflation, but the recent rally in the rand could see a cut in fuel prices in June.

Nevertheless, the higher inflation rate has seen the Sarb warn of a possible rate hikes later this year.

The latest MPC decision means the prime lending rate of commercial banks remains at a more than five decade low of 7%.

It is the fifth consecutive time that the MPC has opted to keep the repo rate on hold, after slashing rates by 300 basis points in total last year in light of the Covid-19 outbreak and subsequent financial fallout.

Read: Reserve Bank sends strong signal rate-cutting cycle is over

Kganyago said that while headline consumer price inflation averaged 3.3% in 2020, the forecast for 2021 is slightly lower at 4.2% (down from 4.3% at the March MPC).

For 2022 and 2023, the bank’s forecast remains unchanged at 4.4% and 4.5%, respectively.

“In 2020, core inflation also averaged 3.3%. The forecast for 2021 is lower at 3.0% [down from 3.3%] and unchanged for 2022 and 2023 at 4.0% and 4.3%, respectively,” he added.

The governor said the bank’s forecast for South Africa’s first quarter growth stands at 2.7%, much stronger than the 0.2% contraction expected at the time of the March meeting.

Kganyago added that the economy is now expected to grow by 4.2% in 2021, up from the 3.8% growth forecast in March.

“The stronger growth forecast for 2021 reflects better sectoral growth performances and a more robust terms of trade in the first quarter of this year. Despite rising oil prices and a higher total import bill, commodity prices have risen to new highs, strengthening income gains to the economy,” he noted.

“Household spending is expected to be healthy this year, in line with the easing of lockdown restrictions and low interest rates.”

Read: Economic recovery: Low rates are playing a starring role

He said Sarb’s policy stance and repurchase rate level remains highly accommodative, adding that this would remain so even with steps taken to normalise interest rate levels in response to rising inflation.

“With inflation expectations remaining stable, and despite inflation risk increasing, the committee still expects inflation to be contained in 2021, before rising to around the midpoint of the inflation target range in 2022 and 2023,” Kganyago pointed out.

Meanwhile, the governor yet again flagged the possibility of rate hikes in the second half of this year.

He said that the implied policy rate path of the bank’s Quarterly Projection Model (QPM) indicates an increase of 25 basis points in each of the second and fourth quarters of 2021.

However, as usual, he stressed that the project is a “broad policy guide”.

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SARB playing chicken with inflation

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