SA’s Reserve Bank sees tepid growth

Reserve Bank Governor Lesetja Kganyago. File picture: Carlo Allegri

Reserve Bank Governor Lesetja Kganyago. File picture: Carlo Allegri

Published May 20, 2016

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Pretoria - South Africa's Reserve Bank left its benchmark lending rate unchanged at 7 percent on Thursday, leaving room for further tightening later in the year as it faced a policy dilemma of rising inflation and low growth.

The bank had raised lending rates by a total of 100 basis points at its previous three meetings, as it fought to keep headline inflation within its target band of between 3 and 6 percent as severe drought and a weaker currency weighed.

Read: SA's March retail sales slow

Governor Lesetja Kganyago said the bank lowered its inflation forecast for the next three years, and the country's economic recovery would be slow.

Kganyago said that while headline consumer prices would average 6.7 percent in 2016, up from previous forecast of 6.6 percent, inflation in 2017 and 2018 would moderate.

“Although the inflation forecast has shown a moderate improvement over the medium term, the risks are still assessed to be on the upside,” Kganyago said.

“The MPC remains focused on its inflation mandate, but sensitive to the extent possible to the state of the economy.”

The rand turned slightly weaker after the decision.

“Should we see a sizeable, adverse rand reaction to any rating downgrade, or deterioration in the political backdrop, then the prospect of further tightening is likely to increase,” said Standard Chartered Bank chief Africa economist, Razia Khan.

Manufacturing and mining output both declined sharply in May, pushing the country's ailing economy closer to a recession.

Inflation stood at 6.2 percent in April versus 6.3 percent in March, data showed on Wednesday.

Kganyago said the bank was particularly concerned about food price inflation, which has risen sharply in the wake of South Africa's worst drought in more than 100 years.

“The recovery in the rand exchange rate in April also proved to be short-lived, as both domestic and external factors weighed on the currency. At the same time, domestic economic growth continues to disappoint,” Kganyago said.

The rand has fallen nearly 10 percent since the sacking of the former finance minister in December and has suffered this year over a row between Finance Minister Pravin Gordhan and the police that has sapped investor confidence.

Fitch and S&P, which both rate South Africa's debt just one notch above subinvestment grade and have warned that poor growth is a major risk to its rating. The agencies are due to make their decision in June.

REUTERS

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