Johannesburg - South Africa’s Reserve Bank kept its benchmark repo rate unchanged at 7 percent on Thursday - in line with expectations - saying that, despite a better growth outlook for South Africa, the exchange rate had re-emerged as a risk to inflation following an increase in domestic political uncertainty.
This is the sixth time in a row the bank has held rates, but the Reserve Bank indicated it might have reached the end of the tightening cycle and that a cut could materialise on a sustained improvement in inflation drivers, particularly the oil price and the rand.
All 30 economists surveyed in a poll last week unanimously predicted the central bank would keep interest rates on hold, most betting that a cut would only come in early 2018.
Nomura’s emerging markets economist Peter Attard Montalto said the statement’s overall stance was a “little more hawkish than expected”.
He said: “Our original preview before this week’s political shock was that the MPC [Monetary Policy Committee] would take a solidly neutral stance, but the rand’s volatility and the uncertainty here have clearly weighted on the majority of the MPC. Yet one member voted for a cut in rates [of 25 basis points] and the market has latched on to this.”
Reserve Bank governor Lesetja Kganyago announced that five members of the MPC preferred an unchanged stance.
Kganyago said the inflation outlook had improved and expected it to return to the target 3 percent to 6 percent range during the second quarter of the year.
CPI inflation was expected to average 5.9 percent for the year, compared with 6.2 percent in the previous forecast, while the forecast for 2018 had moderated from an average of 5.5 percent to 5.4 percent, he said.
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This was mainly due to the further appreciation of the rand exchange rate following the benign market reaction to the US Federal Reserve Bank monetary policy tightening, as well as the significant narrowing of the domestic current account deficit.
The Reserve Bank said earlier this month that the current account deficit narrowed to 1.7 percent of the gross domestic product (GDP) in the last quarter of last year - the lowest shortfall since the first quarter of 2011. Domestic growth prospects remained constrained, although the low point of the cycle was probably behind South Africa.
“Demand pressures are expected to remain weak amid low business and consumer confidence,” he said. “The 2016 annual GDP growth of 0.3 percent is likely to have been the low point of the growth cycle, and a mild recovery is expected over the forecast period. The bank’s forecast for GDP growth has been revised up by 0.16percentage points in both 2017 and 2018, to 1.2 percent and 1.7 percent, with growth of 2 percent forecast for 2019.”
However, Kganyago said the growth outlook remained disappointing and the MPC was concerned that increased political uncertainty could impact negatively on private sector investment and household consumption expenditure. He said the risks to the growth outlook “are therefore assessed to be on the downside”.
By 5pm the rand had gained 10.75 cents to R12.8389 to the dollar after a flurry of news suggesting there was resistance to a plan by President Jacob Zuma to sack Finance Minister Pravin Gordhan.
South Africa’s currency and other assets have been under pressure since Monday when Zuma ordered Gordhan to abandon an investor roadshow in Britain and fly home.
The MPC would like to see a more sustained improvement in the inflation outlook before reducing rates, he said.
MMI Investments and Savings economist Sanisha Packirisamy said: “Uncomfortably high inflation expectations and the need to maintain an attractive real interest rate profile (to attract foreign capital to cover SA’s external imbalance which is set to widen from levels observed in the fourth quarter of 2016) are likely to limit the extent of interest rate cuts, in our view.”
FNB chief executive Jacques Celliers said: “With inflation still above 6 percent but now on a downward path, consumers are eagerly anticipating lower rates.
“However, the risk of price-shocks may still arise from negative commentary by ratings agencies in mid-2017 and Brexit. For these reasons, we urge consumers to build their budgets based on rates stability. While a rate cut will certainly lift consumer confidence, we should not begin ‘pricing-in’ lower rates until greater certainty emerges.”