Sarb said its quarterly projection model showed that there could be a 25-basis-point increase in the repo rate between now and 2019, and a further two in 2020.
Sarb governor Lesetja Kganyago said future policy decisions would be data-dependent and sensitive to the assessment of the balance of risks to the outlook.
“The implied path remains a broad policy guide which can and does change in either direction between meetings in response to new developments and changing risks,” Kganyago said.
“In considering the impact of the VAT increase, the approach of the Monetary Policy Committee (MPC) is to look through the first-round effects of this increase and focus on the second-round effects, which are expected to be relatively small.”
Yesterday, the Sarb slashed the repo rate by 25 basis points to 6.5percent - its second cut in less than a year - but quickly pointed out that this did not signal a new loosening cycle.
FNB chief economist Mamello Matikinca said uncertainty around the medium-term inflation outlook remained and the increase in VAT next month, in particular, posed an upside risk to the inflation outlook.
“While our preliminary forecast suggests that inflation should, despite the VAT hike, remain well within the Sarb’s target range, the bank may opt to wait for more evidence of the effects of the VAT increase on inflation before it makes further adjustments to the policy rate,” Matikinca said.
Statistics SA said last week that the Consumer Price Index increased 4percent year-on-year in February, easing from a 4.4percent rise in January. It was the lowest inflation rate since March 2015.
Even in the context of the low inflation rate, the second rate cut in less than a year was opposed by some members of the bank’s MPC, with three members voting to keep the repo rate unchanged, while four were in favour of a cut.
Africa Economist at Capital Economics, John Ashbourne, said yesterday’s interest rate cut did not signal the start of a new easing cycle.
“Kganyago also stressed the potential risk posed by tightening US monetary policy. We expect that the Fed will hike rates three more times over the duration of the year, which will further reduce the Sarb’s willingness to loosen policy,” Ashbourne said.
The rand weakened to R11.78 against the dollar by 5pm from its opening level of R11.64 and 13 cents weaker.
The Sarb also showed its conservative hand yesterday, raising its forecast for gross domestic product (GDP) growth this year from 1.4percent to 1.7percent.
Kganyago said the modest growth forecast was due to “too many unknowns”.
On Tuesday, International ratings agency S&P Global Ratings lifted South Africa’s GDP forecast for 2018 from 1percent to 2percent.
Finance Minister Nhlanhla Nene earlier this month said National Treasury would probably raise its projections for economic growth this year when it released its mid-term budget in October.
North West University School of Business economist Raymond Parsons said the previously hesitant economic recovery was now steadily broadening.
“What remains important now is that the structural reforms and policy certainty needed to translate the present economic recovery into much higher sustainable growth rates over the longer term begin to take place,” Parsons said.