The Reserve Bank on Thursday increased South Africa’s repo rate by 25 basis points to 7% per annum.
“Given the upside risks to the inflation forecast and the protracted period of the expected breach, the MPC decided that further tightening was required to complement the previous moves. Accordingly, the MPC decided to increase the repurchase rate by 25 basis points to 7% annum, effective from 18 March 2016,” Governor Lesetja Kganyago said.
The increase follows on the Monetary Policy Committee’s second meeting of the year. In January, the MPC raised the repo rate by 50 basis points to 6.75%.
According to the Governor, three members of the MPC favoured a 25 basis point increase, while three members preferred no change.
“The committee faced the continuing dilemma of a deteriorating inflation environment and a worsening growth outlook. The MPC remains sensitive to the possible negative effects of policy tightening on cyclical growth but will remain focused on its mandate of maintaining price stability,” said Kganyago.
The Governor said since the last meeting of the MPC, headline inflation has exceeded the upper end of the target range (which is between 3% and 6%) as pressures from higher food prices in particular have intensified.
Inflation is still expected to remain outside the target range for an extended period, and upside risks remain.
The Reserve Bank now expects inflation to average 6.6% and 6.4% in 2016 and 2017, respectively, compared with 6.8 % and 7% previously. The forecast period has been extended to the end of 2018, and the forecast average for that year is 5.5%.
However, inflation is expected to peak at 7.3% in the fourth quarter of 2016.
When coming to the exchange rate, the rand recovered somewhat from the lows experienced in December and January but remains highly volatile and vulnerable to domestic and external developments.
The central bank said the domestic economic growth outlook has deteriorated further.
“Annual economic growth of 1.3% in 2015 was in line with the Reserve Bank’s expectations but the forecasts for 2016 and 2017 have been revised down from 0.9% and 1.6%, to 0.8% and 1.4%. Growth of 1.8% is forecast for 2018.”
Food price pressures, driven by the drought and the depreciated exchange rate, have intensified by more than previously forecast. This, said the bank, remains as a significant upside risk to inflation.
“Although the inflation forecast has improved moderately since the previous meeting of the Monetary Policy Committee, the committee remains concerned about the protracted nature of the breach of the target. Furthermore, the committee assesses the risks to the forecast to be on the upside.”
The main risk factors relate to the exchange rate and food prices. Food prices have been accelerating faster than previously expected due to the weaker exchange rate and the intensification of the drought.
The MPC also expressed concern at South Africa’s weak growth outlook amid negative business and consumer confidence. – SAnews.gov.za