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South Africans are bracing themselves for a rough festive season as the central bank increased its benchmark lending rate by 25 basis points to 6.75% in a close call, saying although near-term inflation was trending lower, the longer term outlook remained elevated.
South African Reserve Bank Governor Lesetja Kganyago announced the latest decision on its benchmark repo rate on Thursday.
Three members of the Monetary Policy Committee (MPC) preferred an increase and three members preferred a hold stance.
“We then closed the room, debated vigorously until a decision was made. In the end the decision was that we go with the 25 basis points hike,” Kganyago said.
“Since the previous meeting of the MPC, the near-term inflation outlook has improved. However, the longer term risks to inflation outlook remain elevated,” he said.
“The weaker exchange rate and the impact of higher oil prices have contributed to inflation since March 2018.
“The Bank’s measure of core inflation, which excludes food, fuel and electricity was 4.2% in October. Producer price inflation for final manufactured goods slowed to 6.2% in September from 6.3% in August.”
Although it remained within the inflation target range throughout the forecast period, the Reserve Bank’s model projected an increase in headline inflation, albeit slightly lower than the September projection.
“Headline inflation is now expected to average 4.7% in 2018 (down from 4.8%) before increasing to 5.5% in 2019 (down from 5.7%) and moderating to an unchanged 5.4% in 2020. Headline CPI inflation is now expected to peak at around 5.6% in the third quarter of 2019,” said Kganyago.
“Forecast for core inflation is 4.3.% in 2018 (down from 4.4.%), 5.3% in 2019 (down from 5.6%) and 5.5% in 2020. Expectations implicit in the break-even inflation rates remain sensitive to exchange rate movements. While 5-year break even rates remains within the inflation target range, the longer break-even rates remain above 6%.”
Rand
Since the September committee meeting, the rand has appreciated by 3.8% against the US dollar.
“The implied starting point for the rand is 14.50 against the US dollar, compared with 14.20 at the time of the previous meeting,” said Kganyago.
“At these levels, the quarterly projection model assesses the rand to be still undervalued.”
Economy
The governor said the global outlook was expected to remain broadly favourable over the short term. However, medium term risks were to the downside due to less synchronised global growth.
“This is amplified by elevated policy uncertainty emanating from escalating trade tensions, tightening global financial conditions and rising geo-political risks,” said Kganyago.
“The MPC assesses the risks to the growth forecast to be moderately on the downside. As previously highlighted the Committee remains of the view that current challenges facing the economy are primarily structural in nature and cannot be solved by the monetary policy alone.”
Decision
“Given the relative stability in the underlying core inflation measure, delaying the adjustment could give the MPC room to re-assess these unfolding developments in subsequent meetings,” he said.
“However, delaying the adjustment could cause inflation expectations to become entrenched at higher levels and thus contribute to second round effects, which would require an even stronger monetary policy response in the future.”
In a poll taken by Reuters last week, 16 of 26 economists said the Reserve Bank would keep its repo rate at 6.50% while the rest opted for a 25 basis-point hike. - Reuters
