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SARB raises repo rate by 25 basis points

17 March 2016 - 17:31 By TMG Digital, REUTERS

The South African Reserve Bank’s Monetary Policy Committee has hiked the repo rate by 25 basis points from 6.75% to 7% to at the end of its three-day March meeting. The MPC said three of its members had voted to raise the rate by 25 basis points while three had voted for it to remain unchanged.The decision to raise rates follows a three day meeting of the Bank's monetary policy committee (MPC).Three MPC members supported a rate hike while three other members favoured unchanged rates."Food price pressures‚ driven by the drought and the depreciated exchange rate‚ have intensified by more than previously forecast and remain a significant upside risk to inflation‚" Bank governor Lesetja Kganyago said.The Bank said while it does not deliberate on politics during meetings‚ the effect on the currency was concerning.Mr Kganyago said‚ however‚ that they would prefer stable politics.The inflation forecast for this year improved to 6.6% from 6.8% previously‚ while that for next year was projected at 6.4% from 7% before. Inflation is forecast to average 5.5% in 2018."These changes are due in part to the higher interest rate assumption following the increase in the repo rate at the previous meeting‚ a slightly less depreciated exchange rate assumption‚ and downward revisions to the international oil price and electricity tariff assumptions‚" Mr Kganyago said.The Bank revised down its economic growth forecast for this year to 0.8% from 0.9% before‚ and to 1.4% from 1.6% before."The potential output growth estimate remains unchanged at 1.5% rising to 1.8% by 2018‚" Mr Kganyago said.Below are some highlights from South African Reserve Bank Governor Lesetja Kganyago at his latest decision on interest rates.InflationAlthough longer term inflation outlook has improved somewhat inflation still expected to remain outside target for an extended period.The forecast period has been extended to the end of 2018, and the forecast average for that year is 5.5 percent.Inflation is now expected to average 6.6 percent and 6.4 percent in 2016 and 2017 respectively.The MPC is cognisant that demand pressures on inflation remain subdued.Food price pressures, driven by the drought and the depreciated exchange rate, have intensified by more than previously forecast and remain a significant upside risk to inflation.GrowthInternational economic outlook remains challenging following a marked decline in global growth in the fourth quarter of 2015.The outlook for many emerging market economies remains weak, with continuing recessions in Brazil and Russia.The growth challenges facing the economy are compounded by the deteriorating outlook for global growth. The committee assesses the risk to the growth outlook to be on the downside.The uncertain prospects for China remain a source of intense speculation and uncertainty for the rest of the global economy.RandThe rand exchange rate recovered somewhat from lows experienced December and January, but remains highly volatile and vulnerable to domestic and external developments.Offsetting factors include the weak domestic growth outcome and higher inflation outlook; the increased risk of a sovereign ratings downgrade; and domestic political developments which have had a significant impact on the rand in the past few days in particular.The exchange rate was also negatively impacted by the wider-than-expected current account deficit, and its slow pace of adjustment to a depreciated exchange rate.DroughtA more protracted drought, combined with a weaker exchange rate and restocking of herds, may keep food price inflation elevated for a longer period than currently forecast...

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