SA Reserve Bank leaves repo rate unchanged

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CAPE TOWN, January 17 – The South African Reserve Bank (Sarb) on Thursday left the repo rate unchanged at 6.75 percent against the background of an improved inflation outlook.

Motivating its first decision on rates for the new year, the bank said international developments have contributed to a more positive inflation outlook since November 2018, when it hiked the rate by 25 basis points.

“Significant declines in international oil prices and a less depreciated exchange rate have been key drivers of this improved outlook. Domestic petrol prices decreased by a cumulative R3.07 per litre (for 95 unleaded in Gauteng) in December and January. Lower food price inflation also contributed to lower consumer price inflation,” Sarb Governor Lesetja Kganyago said.

He said the bank expected headline inflation to average 4.6 percent in 2018 and 4.8 percent in 2019 – down from 5.5 percent — before increasing to 5.3 percent in 2020 and moderating to 4.8 percent in 2021.

“Headline CPI inflation is now expected to peak at around 5.6 percent, in the first quarter of 2020. Core inflation is expected remain unchanged at 4.3 percent in 2018 and forecast to average 5.0 percent in 2019 (down from 5.3 percent), 5.1 percent in 2020 (down from 5.5 percent) and 4.8 percent in 2021.

Kganyago said the “big” adjustment in the bank’s inflation forecast came as a result of the significant drop in the price of Brent crude oil, the improved exchange rate and the fact that an upturn in food prices was kicking up two quarters later than expected.

“The combination of those three meant that there was a big adjustment in the inflation forecast.”

The bank welcomed the South African economy’s recovery from a technical recession but cautioned that growth remained constrained by subdued demand and low levels of consumer and business confidence.

“The domestic growth outlook remains sluggish,” it said.

“Although, [gross domestic product] GDP increased by 2.2 percent in the third quarter of 2018, private sector fixed investment remains weak and production in key sectors is volatile. The Sarb now expects growth in 2018 to have averaged 0.7 percent (up from 0.6 percent in November).”

Its growth forecast for 2019 has been adjusted downwards to 1.7 percent, increasing to 2.0 percent for 2020 and 2.2 in 2021.

“At these growth rates, the negative output gap is expected to close in the first quarter of 2021.”

The repo rate is the benchmark interest rate at which the central bank lends money to other banks. Last year’s increase was the first since March 2016.

Thursday’s decision was widely expected and the rand strengthened marginally after it was announced.

The bank cautioned that while the rand and other emerging market currencies had recently benefited from a weaker US dollar and there were “indications of continued accommodative monetary policy in advanced economies”, the currencies remained vulnerable to changes in investor sentiment.

“The rand also remains sensitive to domestic growth prospects, political developments and policy settings,” it added.

Asked about the ongoing debate about the bank’s mandate and its private shareholders, Kganyago firmly said the bank tried not to engage with political rhetoric.

He said it was plain fact that private shareholders did not own the bank and if a law were drafted to remove them, the Sarb would engage in discussions with the two aims alone, namely to protect its mandate and its independence.

While the Economic Freedom Fighters have argued for an end to private shareholding and the “nationalisation” of the bank, calls have come from the African National Congress for the bank’s mandate to be reviewed to allow for more flexible monetary policy in line with the ruling party’s programmes. This stance has now edged its way into the party’s manifesto for this year’s general elections.

Kganyago said the bank had taken a decision not to comment on election manifestos as it expected to see a lot of those in 2019.

“It is not conceivable that we will be responding to every one of the manifestoes…”

He said the bank’s mandate to protect the value of the currency in the interest of balanced and sustainable growth was enshrined in the constitution and for this gratitude was owed to those who drafted it.

The ANC manifesto calls for more flexible policy “without sacrificing the price stability, but redirecting monetary policy to take into account other socioeconomic objectives, such as employment creation and economic growth”.

Kganyago commented: “Anybody who says the Sarb must focus on growth has clearly not read the constitution because the constitution says what we do is in the interest of balanced and sustainable growth. You can’t have balanced and sustainable growth if you are running imbalances and those imbalances which include having high unemployment.”

Changing the mandate would entail changing the constitution, which would thankfully be a more onerous process than simply changing a law, he added.

“When you talk about changing the mandate you are then talking about changing the constitution but understand what the constitution says.”  (ANA)