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SA Reserve Bank hikes repo rate by 25bps

Off the back of upside inflationary risks.

PRETORIA – The South African Reserve Bank (Sarb) has increased the repo rate by 25 basis points to 6% per annum, off the back of upside inflationary risks, including the vulnerability of the currency to US rate rises and global monetary policy normalisation.

Reserve Bank Governor, Lesetja Kganyago said four members of the monetary policy committee (MPC) voted for the increase, while two voted for it to remain the same.

“Although inflation is currently within the target range, the focus of monetary policy continues to be on the medium-term trend, to ensure inflation remains comfortably within the target range,” he said.

Kganyago said future rate rises would be data dependent.

Inflation outlook

The Reserve Bank expects headline inflation to average 5% in 2015, up from 4.9% at its previous meeting.

It forecasts headline inflation to breach the target for the first two quarters of next year, at 6.9% and 6.1%, then return to the target range by the third quarter.

This assumes electricity price increases of 13% from July 2016 and July 2017.

“The forecast for core inflation is unchanged, and expected to average 5.6% in 2015, moderating to 5.4% and 5.2% in the next two years,” Kganyago said.

He said that nominal wage growth, although moderating, continues to drive inflation higher.

Kganyago added that the upward trend in producer price inflation is expected to persist, “driven by rising agricultural crop prices and electricity tariffs”.

“Food prices remain a concern to the MPC, despite the continued moderation of food price inflation,” he said, pointing to drought in parts of the country contributing to the upside risk outlook.

Exchange rate risk

“Upside risks posed by the exchange rate have increased,” Kganyago said. He noted the sensitivity of the rand and other emerging market currencies to global risk perceptions relating to the Greek crisis, volatility in Chinese equity markets, as well as declining commodity prices and expectations of the US monetary policy tightening.

“The inflation forecast assumes a relatively stable real effective exchange rate over the forecast period… A nominal depreciation in excess of this would pose an upside risk to inflation, although this risk could be ameliorated to some extent should the relatively low pass-through from the exchange rate to inflation persist,” Kganyago said.

Growth and deficit forecasts

The Sarb forecasts a current account deficit of around 4.6% of GDP for the year.

It has revised its GDP growth figure down marginally to 2% in 2015 and 2.1% in 2016, rising to 2.6% in 2017 “when some easing of the electricity supply constraint is assumed”, Kganyago said.

The outlook for consumption expenditure has deteriorated, off the back of higher personal income taxes and electricity tariffs, as well as a reversal of drops in the petrol price.

The Sarb predicts that domestic petrol prices will fall by 40c next month should low international oil prices persist.

According to data from the Sarb, non-residents have to date been net buyers of equity and bonds to the value of R3.7 billion and R2.4 billion respectively.

Read the MPC’s full statement here.

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So I need to understand this-I borrow from the bank to keep my business alive as the economy is not growing. To be loyal to my staff and the country I keep my business and staff employed via bank loans.For my loyalty I get poor governance, high crime, load shedding,and I am continuously been asked to leave South Africa. Today the goose who lays the golden egg was throttled with an small but indicative interest rate hike! So now my overdraft interest is higher, my car repayment goes up, my house bond goes up and I face load shedding because I cannot afford a generator as my goose has been throttled!

End of comments.

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