Reserve Bank announces decision to keep interest rates unchanged amid improved inflation outlook
Repo rate remains stable at 6.75%
The Reserve Bank’s monetary policy committee (MPC) kept the interest rates unchanged, as expected, on Thursday.
The repo rate thus remains at 6.75%. All 18 economists polled by Bloomberg expected the decision.
“Since November 2018, international developments have been the major contributor to an improved inflation outlook,” Reserve Bank governor Lesetja Kganyago said.
‘The economy’s recovery from the technical recession ... is welcomed, but it remains modest’ Lesetja KganyagoRESERVE BANK GOVERNOR
“Significant declines in international oil prices and a less depreciated exchange rate have been key drivers of the improved outlook.”
Inflation is expected to moderate in 2019 but the Bank said it would prefer inflation anchored at the midpoint of the 3% to 6% target range.
Inflation is expected to average 4.8% in 2019.
The Bank forecast the following path for inflation:
● 2018: 4.6%, from 4.7% at the November meeting.
● 2019: 4.8, from 5.5% in November.
● 2020: 5.3%, from 5.4% in November.
● 2021: 4.8%.
Inflation is now expected to peak at 5.6% in the third quarter of 2018.
GDP growth is expected to be 0.7% in 2018, higher than the 0.6% forecast in November.
For 2019, the forecast has been revised down from 1.9% to 1.7%.
The Bank’s outlook for GDP growth now looks like this:
● 2019: 1.7%, from 1.9% in November.
● 2020: 2%, from 2% in November.
● 2021: 2.2%.
“The economy’s recovery from the technical recession in the first half of 2018 is welcomed, but it remains modest, with growth constrained by subdued demand as a result of weaker levels of consumer and business confidence,” Kganyago said.
The US Federal Reserve has adopted a more dovish stance, signalling a slower pace of rate hikes. It raised rates four times in 2018, by 25 basis points each time. It is now expected to hike rates only twice this year.
In November, the MPC hiked interest rates for the first time in two years by 25 basis points, in response to long term risks to inflation, including tighter financial conditions such as interest-rate hikes in the US, a weaker exchange rate, a high wage rate and oil price, and rising electricity and water tariffs.
The rand extended its losses after Kganyago’s announcement, and was R0.72% lower against the dollar at R13.787, 1.15% lower against the pound at R17.8344 and 0.89% lower against the euro at R15.7369.
The rand’s losses were largely in line with its emerging market peers, with the Brazilian real under the most strain.
Analysts cited uncertainty over Brexit, as well as slowing global economic growth, as the primary factors causing the risk-off tone on global markets.