Johannesburg - The monetary policy committee (MPC) of the Reserve Bank yesterday retained its view that it might be close to the end of the hiking cycle, but warned that there could be a re-assessment of this position if the upside risks to the inflation outlook transpired.
Reserve Bank Governor Lesetja Kganyago announced that the MPC had decided to keep the repo rate at 7 percent in line with market expectations, but said the inflation trajectory had come uncomfortably close to the upper end of the target range and the uncertain environment and moderately higher risks to the inflation outlook required continued vigilance.
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Delivering the last scheduled rate decision for the year, Kganyago said food price inflation was expected to moderate at a slower pace than what the bank had previously forecast.
Statistics SA said on Wednesday that food prices, which have been pushed up by the worst drought in more than a century, rose by 12 percent in October from a year earlier and 0.9 percent from September.
Kganyago said: “Food price inflation remains a significant driver of inflation, and is sensitive to the continuing drought. While food price inflation is still expected to moderate from early 2017, the pace of decline is expected to be slower than previously forecast.”
He said this had led to an upward revision to the food price assumption in the forecast.
“The change is mainly due to the delayed impact of meat prices, which are now expected to peak only in early 2018, as farmers rebuild their herds during 2017.”
He said the Reserve Bank forecasts for inflation this year remained unchanged from September’s meeting at 6.4 percent, as it predicted that consumer prices would peak at 6.6 percent in the fourth quarter before moderating in the second half of next year due to improved weather conditions.
On hold
The bank has kept the benchmark rate on hold at its last four meetings. It has raised the rate by a cumulative 200 basis points since early 2014.
The rand pared losses against the dollar after the Reserve Bank left the repo rate unchanged, and was bid at R14.1895 at 5pm compared with R14.2375 before Kganyago’s speech.
He said the rand would remain sensitive to the sovereign ratings announcements today by Moody’s and early in December by S&P Global Ratings.
Kganyago made it clear that the MPC considered a downgrade to sub-investment grade only a possibility. “If the financial markets have priced in a downgrade, and a downgrade does not take place, we would expect that there would be a possible repricing in financial markets as well.”
FNB chief executive Jacques Cilliers said with rating reviews of South Africa just a few days away, consumers were justifiably wary. “The prospect of a rating review to sub-investment grade is in itself undermining the economy. Our economic well-being will be largely determined by our own initiatives.”
Kganyago said the domestic economic growth outlook remained subdued, although the low point of the cycle appeared to be behind us. He said the Reserve Bank’s forecast also remained unchanged at 0.4 percent for this year, and 1.2 percent and 1.6 percent for the next two years.
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