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Reserve Bank leaves rates unchanged‚ with inflation risk slightly higher

Reserve Bank Governor Lesetja Kganyago
Reserve Bank Governor Lesetja Kganyago

The Reserve Bank held interest rates steady‚ as widely expected‚ on Thursday.

Thursday’s decision left the repo rate unchanged at 7%. The Bank has raised rates by 75 basis points since the start of the year‚ and by 200 basis points since January 2014. The last rate increase was 25 basis points in March 2016‚ and followed a 50-point hike in January.

 Announcing the decision of the monetary policy committee‚ Bank governor Lesetja Kganyago highlighted heightened global uncertainties‚ following the election victory of Donald Trump‚ and its implications for emerging markets and the rand.

He said the outlook for inflation and growth had not changed much‚ though the risk for inflation was slightly higher‚ with food inflation again driving both producer and consumer inflation higher in October. Food inflation was expected to peak only in early 2018.

Oil prices were expected to continue rising‚ and Kganyago pointed to an 88c a litre rise in the petrol price over October and November.

Growth remained subdued but the bottom of the cycle appeared to have been reached‚ Kganyago said.

The Bank had been expected to leave rates unchanged‚ even though recent comments by US Federal Reserve chairwoman Janet Yellen suggest a US rate hike is almost inevitable in December — a view bolstered by the release on Wednesday night of the minutes of the Fed’s last policy meeting‚ on November 1-2.

Rising US rates are inflationary for an emerging market such as SA‚ as they increase the yield for holding dollars‚ which lowers the incentive for investors to buy the riskier rand. A weaker rand stokes inflation by making imports more expensive.

The Bank’s job in balancing the need to address sluggish economic growth with containing inflation has been difficult this year‚ with economic growth stubbornly slow while inflation has been pulled higher by‚ among other factors‚ double-digit food inflation as a result of the harsh and protracted drought affecting key agricultural areas.

A global economy that is in the doldrums has added to local factors such as labour instability‚ policy uncertainty and political concerns to suppress growth.

International rating agencies have repeatedly flagged slow growth‚ and the structural impediments to addressing this‚ as among their main concerns.

 Their reviews of SA’s credit ratings are due in the next week or two‚ with Moody’s due to be the first to make an announcement‚ on Friday.

Forecasts

The Bank left its forecasts for both growth and inflation unchanged from September’s meeting.

The Bank is forecasting economic growth of 0.4% for 2016. That would pick up to 1.2% in 2017‚ and 1.6% in 2018.

On inflation‚ the Bank is forecasting CPI to average 6.4% year on year in 2016‚ 5.8% in 2017 and 5.5% in 2018.

The Bank sees inflation peaking at 6.6% in the fourth quarter of this year.

 

 

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