South Africa keeps repurchase rate at 7%; inflation forecast improves

By Tali Rackner

Norfolk, Va., March 30 – The Monetary Policy Committee of the South African Reserve Bank decided to maintain its repurchase rate at 7%.

Five members voted to keep the rate unchanged while one member voted for a reduction of 25 basis points, according to a Thursday press release.

The committee said the inflation forecast has improved, reversing most of the deterioration seen at the previous meeting. This was mainly due to the further appreciation of the rand exchange rate following the benign market reaction to the U.S. Federal Reserve monetary policy tightening, as well as the substantial reduction in the domestic current account deficit.

Inflation is now expected to return to within the target range in the second quarter of 2017, compared to the previous projection of the fourth quarter.

However, the committee said, “the recent heightened domestic political uncertainty has reversed some of these exchange rate gains, and the risk of further rand weakening overshadows the inflation outlook.”

The bank reported that domestic growth outlook remains constrained, though the low point of the cycle is most likely in the past. Demand pressures are anticipated to remain weak amidst low business and consumer confidence, the committee said.

Global inflation offers 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, the bank assessed.

Overall, the committee said it measures the risk to the inflation outlook to be moderately on the upside, mainly due to the high degree of exchange rate uncertainty. It expects the rand to react further to unfolding political developments until a higher degree of certainty and confidence is reestablished.

The committee stressed its concern about the elevated level of inflation expectations. While the near-term reversal was not unexpected, given the deterioration of the short-term inflation outlook in January, the longer-term inflation trajectory is still “uncomfortably at the upper end of the target range.”

The committee believes that it may have reached the end of the tightening cycle. However, it said it “would like to see a more sustained improvement in the inflation outlook before reducing rates. This assessment may however change if the inflation outlook and the risks to the outlook deteriorate.”

© 2015 Prospect News.
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