South Africa’s Reserve Bank left its benchmark repo rate unchanged at 7.0% on Thursday, while lending rates remain at 10.5%.
The MPC said it felt that there is some room to pause in this tightening cycle.
Five members preferred no change, while one member preferred a 25 basis point increase.
SARB Governor, Lesetja Kganyago, said the country’s inflation and growth dynamics continue to highlight the policy dilemma facing monetary policy.
“Although headline CPI inflation has moderated since February, the respite is expected to be temporary, as food and petrol price pressures continue to intensify. The recovery in the rand exchange rate in April also proved to be short-lived, as both domestic and external factors weighed on the currency.”
“At the same time, domestic economic growth continues to disappoint. While there are signs that the economy may be reaching the low point in the growth cycle, the recovery is expected to be slow with downside risks. Global economic growth and financial market conditions have stabilised somewhat since the previous MPC meeting, but a high degree of risk and uncertainty persists,” Kganyago said.
He said that inflation is now expected to average 6.7% in 2016, compared with 6.6% previously. In 2017 and 2018 inflation is expected to average 6.2% and 5.4%, marginally down from the previous forecast.
The expected peak, at 7.3% in the fourth quarter of 2016, is unchanged, SARB said.
The forecast for core inflation is slightly improved, with a lower forecast for 2016 of 5.9% from 6.2% previously. Forecasts for 2017 and 2018 are unchanged at 5.7% and 5.2%.
“Core inflation is expected to breach the upper end of the target range in the third quarter of 2016 for four consecutive quarters, with a peak of 6.2% (previously 6.5%) in the third and fourth quarters of 2016 and the first quarter of 2017,” Kganyago said.
Jacques Du Toit, Absa senior economist, said that the repo rate was kept unchanged despite continued rand exchange rate weakness and inflationary pressures, to some extent driven by sharp rising food prices since late last year as a result of the drought.
The rand traded at R15.89 against the dollar, at R23.26 to the pound, and at R17.86 against the euro.
Du Toit said that while commercial banks will keep their prime lending and variable mortgage interest base rates unchanged, further hikes in lending rates are forecast towards the end of the year to curb inflation, with debt repayments to rise and consumers to experience increased financial strain as a result.
“Credit-risk profiles, financial vulnerability and consumer confidence remain fragile, with credit providers’ risk appetites and lending criteria to continue to reflect trends and the outlook for the economy and consumer finances.”
Johan Gouws, Head Absa Asset Consultants Barclays Wealth & Investment, said: “The decision to leave interest rates unchanged speaks of a pragmatic approach by the Monetary Policy Committee in living up to their mandate of price stability while considering the broader context and challenges facing the local economy.”
Source: Business Tech