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Sarb keeps repo rate unchanged at 5.75%

But warns of looming inflation threats from rising fuel and power costs.

South Africa’s Reserve Bank left interest rates unchanged at 5.75% as expected on Thursday, balancing concerns about a deterioration in the inflation outlook with those over weak economic growth.

The bank has kept its benchmark rate at 5.75% since July last year, as Africa’s most advanced economy struggles to grow due to structural constraints, including power shortages as state utility Eskom fails to cope with demand.

“The growth outlook remains constrained by electricity supply concerns and low business confidence, and the risks to the growth forecast are assessed to be moderately on the downside,” central bank Governor Lesetja Kganyago told a news conference.

On the other hand, the near-term inflation outlook had deteriorated with the partial reversal of recent fuel price declines, meaning the scope to pause on policy tightening had narrowed.

“However, given the uncertainties related to US policy normalisation and the weak state of the domestic economy, the MPC has unanimously decided to keep the repurchase rate unchanged for now,” Kganyago said after the bank’s monetary policy committee concluded a three-day meeting.

“The timing of future interest rate increases will be dependent, as before, on a range of domestic and external factors.” 

The rand remains a persistent background concern for them – due to both the prospect of US rate hikes and the uncertainty over the local balance of payments dynamics. Locally, wages are their biggest concern.

For now, the MPC looks willing to look through the surge in inflation they expect in 1Q16 (due to base effects) to 6.7%.  However, if the rand weakens notably or wage settlements surprise on the upside, then a rate hike this year becomes very likely. 

Hikes are coming

Nazmeera Moola, economist and strategist, Investec Asset Management, says: “The South African Reserve Bank (SARB) kept interest rates on hold today. It was clear that the Monetary Policy Committee (MPC) is worried about the growth outlook – they lowered their near-term potential growth rate from 2.5% to 2% – but remain focused on the inflation target. They have significantly raised their inflation forecasts for 2015 (from 3.8% average in January to 4.8% now) on the back of higher food prices, petrol prices and electricity prices.”

Effect on residential housing market

Kay Geldenhuys, ooba’s manager for property finance processing, comments: “ooba welcomes the South African Reserve Bank’s decision today to keep the interest rate unchanged.  The decision is a great relief to South African property owners and the relatively low and stable interest rate environment that continues to prevail is good news for the residential housing market as it gives prospective homebuyers an opportunity to acquire property and secure homeloan finance at an affordable cost of credit.  The South African property market outlook for 2015 is extremely positive with steady house price growth, stable and relatively low interest rates, favourable inflation outlook and increased lenders’ confidence.”

©2015 Bloomberg News

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