The South African Reserve Bank keeps repo rate steady at 3.5%

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The South African Reserve Bank (Sarb) decided to keep the repo rate steady at 3.5% on Thursday, following the conclusion of its latest Monetary Policy Committee (MPC) meeting.

This is in-line with expectations of most economists and market commentators.

The unanimous decision to hold the rate for the fourth consecutive MPC meeting, means that the prime lending rate of commercial banks remains at a more than four decade low of 7%.

It comes despite headline Consumer Price Inflation (CPI) slowing to 2.9% year-on-year in February from 3.2% in January, according to data released by Statistics South Africa on Wednesday.

The latest inflation figure is below the bottom end of Sarb’s 3%-6% CPI target. However, rising crude oil and food prices are expected to gain traction in April with a more than R1 hike in petrol forecast.

This, together with continuing Covid-19 uncertainty and increasing prospects of a third wave of infections in the country, has seen Sarb governor Lesetja Kganyago and his fellow MPC members remain cautious on any further repo rate cuts.

In the wake of the Covid-19 pandemic, subsequent lockdowns and financial fallout, the Sarb slashed its repo rate by 300 basis points in total last year.

Growth

Sarb‘s first-quarter forecast for economic growth is at -0.2%, down from 1% at January’s MPC meeting.

“Global growth, progress in vaccination, a low cost of capital, and high commodity prices are all supportive of growth. However, new waves of the Covid-19 virus are likely to weigh on economic activity both globally and locally,” said Kganyago.

“In addition, ongoing constraints to the domestic supply of energy and uncertainty about vaccine rollout continue to pose downside risks to growth,” he noted.

Inflation

The governor said overall risks to the inflation outlook appear to be balanced. Local food price inflation is lower despite global highs; medical services inflation remains low, but this is likely temporarily.

“Oil prices have been revised up sharply in the forecast, resulting in higher petrol price inflation, at 12.7% for 2021, compared to 4.4% at the time of the January meeting. Electricity prices are significantly higher at 9.7% for 2021 [up from 8.1%],” Kganyago, however pointed out.

He said market-based expectations for short-term inflation are lower, but have increased for the medium and longer-term horizons.

“While global food price inflation remains high, local food price inflation is slightly lower than previously expected and should remain broadly contained due to higher local crop production,” he explained.

“Oil prices have increased sharply this year and are expected to remain at these levels over the forecast horizon… Electricity and other administered prices remain upside risks to the inflation trajectory,” he added.

The governor said unless the outlined risks materialise, inflation is expected to be well contained in 2021, before rising to around the midpoint of the inflation target range in 2022 and 2023.

Meanwhile, Kganyago indicated that the MPC may increase the repo rate later this year.

“The implied policy rate path of the [Sarb’s] Quarterly Projection Model [QPM] indicates an increase of 25 basis points in each of the second and fourth quarters of 2021. Compared to the previous meeting, the shift in the rate path from the third to the fourth quarter is due to somewhat lower inflation in 2022,” he said.

“As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks,” he however added.

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