Johannesburg – The South African Reserve Bank has kept the repo rate at 7 percent, and said the country may be at the end of the tightening cycle.
However, given the uncertainties in the economy, this may change.
Addressing the media, Reserve Bank governor Lesetja Kganyago noted food inflation was almost 12 percent because of the drought, and would peak in the fourth quarter. He noted the economy was improving and revised SA’s gross domestic product to 0.4 percent this year, growing to 1.2 percent in 2017 and then 1.6 percent in 2018.
However, Kganyago warned that several key sectors, such as construction, were still under pressure. He noted inflation has improved, and will peak at 6.7 percent in the fourth quarter, compared to the 7.7 percent previously expected. It should come in lower than previously expected, over the next few years.
Yet, says Kganyago, gains in employment were thanks to temporary jobs because of the elections, and consumers remain under pressure.
Kganyago adds unions, despite the lower inflation rate, continue to request wages higher than inflation. In addition, consumers are battling with expenditure being crimped, and loans being under pressure.
The corporate sector has been more resilient, but below peaks. Food inflation should peak at 12.3 percent in the fourth quarter, a bit below previous forecasts, but read meat will go up, Kganyago says.
Unions stayed higher, despite higher inflation expectations. Petrol is expected to increase in October.
Despite these issues, headline inflation is not expected to spike as much as previously thought. Despite this, the longer term outlook remains close to the top end of the band. Despite this, the rand is vulnerable, says Kganyago.
Kganyago says global growth has a poor outlook, and even the improvement in commodity prices canot be guaranteed.
The South African reserve Bank has been concerned with inflation, which has been above or dangerously close to the top end of its 3 to 6 percent target band this year. On Wednesday, Statistics SA said inflation in August was 5.9 percent, a slight decline on the previous month’s 6 percent.
This, many believed, gave the Monetary Policy Committee room to leave rates unchanged this month.
The prime lending rate is currently 10.5 percent, a rate that has placed a large burden on those who are in debt.
Investec said in a note before the announcement that it believed that a 0.25 percent hike was more likely in November – when the MPC next meets again – than on Thursday.
However, it noted that markets had been factoring in a 25 basis point interest rate hike this year, and possibly even this month.
Further good news for SA is the relative strengthening of the rand, which is still trading at below 14 to the dollar. In addition, investors in emerging markets worried that the US Federal Reserve may hike rates are feeling somewhat more comforted today after rates were left unchanged on Wednesday, although the Fed is expected to hike at least once this year.
Although South Africans may breath a sigh of relief this afternoon, indications are that – despite lacklustre economic growth – rates are unlikely to come off in the near future.
Instead, the best – given inflation threats – South Africans can hope for in the near future is flat rates.
Over the longer term, however, the bank has to keep a lid on inflation, and this makes a hike likely before the festive season spending spree.