Reserve Bank raises repo rate on inflation concerns
The Reserve Bank’s monetary policy committee (MPC) has hiked the repo rate by 25 basis points for the first time in two years.
"Since the previous meeting of the MPC, the near-term inflation outlook has improved, however, the longer-term risks to the inflation outlook remain elevated. The weaker exchange rate and the impact of higher oil prices have contributed to increasing inflation since March 2018. At the same time, domestic growth remains weak,” said Reserve Bank governor Lesetja Kganyago.
Analysts were at odds over what the Reserve Bank’s MPC’s move would be. Of the 21 economists in a Bloomberg survey, 11 forecast an increase to 6.75% and the rest predict the rate will stay at 6.5%.
Analysts haven’t been this divided on a rate decision since March 2016 - which is also the last time the Bank hiked rates.
"The approach of the MPC is to look through the first-round effects and focus on the possible second-round effects of supply-side shocks. However, shocks of a persistent nature such as the extended periods of currency depreciation, elevated oil prices and multi-year electricity price increases make it difficult to disentangle these first and second round effects,” he said.
The announcement will knock consumers and will come as a blow to President Cyril Ramaphosa who is struggling to boost the battered economy and make a dent in the unemployment rate which is nearing 30%.
Long-term risks to the inflation outlook include tighter global financial conditions, a weaker exchange rate, high wage rate, oil prices and rising electricity and water tariffs.
"However, demand pressures are still not assessed to pose a significant risk to the inflation outlook."
The latest retail sales, manufacturing production and mining figures have all come in below the market consensus, highlighting the fragility of SA's economic recovery.
"The MPC assess 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 monetary policy alone," Kganyago said.
"Prudent macroeconomic policies are essential to ensuring that growth is sustainable and that the economy is more resilient to shocks."
While inflation has remained firmly in the 3%-6% target band set by the Bank, the MPC has made it clear that they would prefer inflation anchored to the 4.5% mid-point.
The Bank also came under pressure from the IMF earlier this week to maintain inflation at 4.5% with a warning not try to boost an economy weakened by structural constraints.
"The MPC noted the rising inflation trajectory which, while remaining within the target range, continues to deviate from the mid-point of the target range," he said.
Since the last MPC, the rand has appreciated around 2% while oil prices have declined 20%, all in the context of a weak growth environment.
"Over the medium term, it is likely that the rand, along with other emerging market currencies, will remain volatile,” Kganyago said.