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Reserve Bank leaves repo rate unchanged

Local consumers will watch to see if MPC adopts a more accommodative monetary policy stance – KPMG.
Lesetja Kganyago, SARB Governor

Sarb’s Monetary Policy Committee (MPC) has left the repo rate unchanged at 7%. Five members of the MPC voted for an unchanged rate, while one preferred a 25 basis-point reduction.

Lesetja Kganyago, SARB Governor, said the MPC believes we might be at the end of the tightening cycle. However, the bank would like a more sustained improvement in inflation outlook before cutting rates. 

“Overall, the MPC assesses the risk to the inflation outlook to be moderately on the upside, mainly due to the high degree of exchange rate uncertainty. The MPC sees no evidence of significant demand pressures impacting on inflation. The growth outlook remains disappointing, and the MPC is concerned that increased political uncertainty could impact negatively on private sector investment and household consumption expenditure, and further undermine employment growth. The risks to the growth outlook are therefore assessed to be on the downside,” he said.


Since the previous MPC meeting the inflation outlook’s improved, due to further appreciation of the rand exchange rate, after a “benign market reaction to the US Fed monetary policy tightening” and significant narrowing in SA’s current account deficit.

  • CPI year-on-year inflation rate for all urban areas down to 6.3% in February, (6.6% in January).
  • CPI inflation seen averaging 5.9% in 2017 (6.2% before), 2018 at 5.4% (5.5%), and 2019 at 5.5%. Improvement’s due more appreciated exchange rate assumption.

Food price inflation (10%), moderated (peaked at 12% in December). Expected to average 7.4% in 2017 (7% before) and 5.2% in 2018 (5%).

  • Core inflation is 5.2%, down from 5.5% (peaked at 5.9% in December).
  • PPI for final manufactured goods was 5.6% in February (5.9% in January).
  • Headline inflation seen returning to within the target range in Q2 2017 vs Q4 previously, and seen staying within the range for the rest of the forecast period.
  • The forecast for core inflation is marginally lower than before at an average of 5.4% in 2017, and unchanged at 5.2% in 2018. An average core inflation of 5.3% is expected in 2019.
  • The exchange rate’s seen lowering petrol price inflation
  • Inflation as measured by BER shows deterioration over near-term: 2017 average up to 6.2%, 2018 up to 5.9%, 2019 at 6%.

“While the near-term reversal was not unexpected, given the deterioration of the short-term inflation outlook in January, the longer term expectations remain anchored uncomfortably at the upper end of the target range. Not all the inflation risk factors are on the upside. The deterioration in the forecast at the previous meeting was due in part to a higher international oil price assumption. This assumption has not been adjusted to reflect the recent market developments. There is a downside risk to this assumption, given the possibility of these more moderate trends persisting. A further downside risk comes from electricity price increases, which could turn out to be lower than the 8.0% currently in the forecast from mid-2017.”


The rand exchange rate has been relatively resilient in the past few months. “The rand has depreciated significantly in response to increased domestic political uncertainty and the exchange rate has reemerged as an upside risk to the inflation outlook.”

The improving trend of the deficit on the current account’s reduced perceived vulnerability of the rand to possible capital flow reversals. “However, while significant adjustment of the current account has occurred, the deficit is not expected to remain at the level seen in the fourth quarter of last year.”

“The rand movements this week have been purely due to the level of political uncertainty,” Kganyago emphasised in the Q&A.

“At current levels of around R13.00 against the US dollar, the exchange rate is still moderately stronger than the level implied in the exchange rate assumption in the forecast. However, the rand is likely to react further to unfolding developments until a greater degree of certainty and confidence is restored.”

The governor said the possibility of the exchange rate overshooting in the short run can’t be ruled out. 


The domestic growth outlook remains weak. 2016’s GDP growth averaged at 0.3% – likely to have been the low point of the growth cycle. Mild recovery expected over the forecast period.

“The Bank’s forecast for GDP growth has been revised up by 0.1 6 percentage points in both 2017 and 2018, to 1.2% and 1.7%, with growth of 2.0% forecast for 2019.”

Main drivers of growth seen being net exports and positive, although weak, household consumption expenditure growth.

The growth outlook doesn’t help employment creation, said the governor.

Petrol price

International oil prices have declined. “Although Brent crude oil prices increased by about 10% in the wake of this agreement, these gains have been largely reversed, with oil prices back in the region of US$50 per barrel for the past three weeks.” As such, a reduction in the SA petrol price is expected in April, “despite the 39 cent increase in the Road Accident Fund and fuel levies provided for in the February budget.”

Emerging markets

The more positive growth outlook in advanced economies has meant a more favourable environment for emerging markets (EMs) in general.

Recent heightened domestic political uncertainty has reversed some exchange rate gains.

The risk of further rand weakening overshadows the inflation outlook.

Domestic growth prospects remain constrained, but low point of the cycle’s probably over.

Global outlook

Global economy shows continued signs of a improvement. US growth outlook favourable, but, there’s growing uncertainty about the timing and size of the expected fiscal stimulus.

Growth prospects in Japan and Europe more promising.

Outlook for emerging markets is more positive, partly due to recovery in advanced economies, and stronger demand in China. Inflation in some emerging economies reflect divergent currency movements.

“Global inflation provides a mixed picture with the recent decline in international oil prices threatening to reverse the broad-based increases in headline inflation in the advanced economies. Some inflation normalisation is evident in the US and the euro area, but Japan is showing less momentum in price and wage growth. Inflation in the UK is expected to overshoot the target for some time, as the economy adjusts to a weaker currency.”

Other stats:

  • The agricultural sector is seen returning to positive growth.
  • A modest recovery in the manufacturing sector is expected
  • Low growth in gross fixed capital formation still a downside risk to growth in the short term. “In 2016 gross fixed capital formation contracted for the first time since 2010, with the ratio of fixed capital formation to GDP declining from 20.4% in 2015 to 19.6% in 2016.”
  • Private sector investment still weak – contracted for five successive quarters.
  • BER Manufacturing survey shows sharp decline in capital investment over the next 12 months, due to political climate. 
  • Consumption expenditure by households, which grew by 0.8% in 2016 remains subdued amid low consumer confidence.
  • New vehicle sales continued to decline in February, although exports increased significantly.

“These trends are expected to persist as the impact of a higher tax burden, low employment growth and weak wealth effects take their toll on consumption expenditure. In addition, credit extension by banks to the private sector continues to grow at low rates….”

Comments and reactions 

Maura Feddersen, Economist at KPMG South Africa, says local consumers will be watching closely to see when the MPC may adopt a more accommodative monetary policy stance. “In view of rising levels of household debt, a higher tax burden, low employment growth and weak credit extension, consumers are desperate for lower interest rates and easing pressure on debt servicing costs in months to come.

“In his March statement, Governor Kganyago noted the SARB now expects headline inflation to return to within the target range in the second quarter of 2017 compared to the fourth quarter previously. Although the inflation outlook has thus improved since January’s MPC meeting, recent domestic uncertainty renews pressure on the currency and reduces the SARB’s room to lower interest rates in 2017. Looking ahead, the MPC currently anticipates holding the repo rate stable at 7% throughout this year and next, until inflation returns comfortably to within the target range,” says Feddersen.

“It remains an open question whether the positive factors supporting renewed growth – such as exports and agricultural recovery from the drought – will outweigh the negative ones outlined in the MPC statement,” says NWU School of Business and Governance economist, Prof Raymond Parsons.

“Presently the SARB’s leading economic indicators show a welcome positive trend. Taking the balance of risks into account, therefore, the MPC decision to leave interest rates unchanged for the time being is the right one, and confirms the importance of resolving the present political impasse in SA as soon as possible,” he adds.

The unchanged repo rate provides comfort for those wanting to purchase a home and those with existing mortgages, says Pam Golding Property group CEO Dr Andrew Golding.

“Furthermore, the prognosis seems to be that the repo rate is likely to remain stable for the remainder of the year, with the possibility of an interest rate cut in 2018 or even at the end of 2017. [This] is particularly welcome news for consumers who are feeling the pinch of ever-rising costs, a factor which is most evident among those gaining a foothold or already on the lower rungs of the residential property ladder, which brings us to another important point.”

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