South African Reserve Bank: No Change in Policy Interest Rate

July 21, 2016

Like the ECB Governing Council and Bank Indonesia’s Board of Governors, each of which also held policy meetings today, South Africa’s Monetary Policy Committee chose not to initiate a change at this time.  Whereas the other two central banks might arguably eased, the risk in the case of South Africa was on the upside.  According to a released statement,

While the committee remains concerned about the overall inflation trajectory, the assessment of the balance of risks to the inflation outlook and the weak domestic economy has provided some room to delay further tightening of the monetary policy stance for now. Accordingly the MPC has unanimously decided to keep the repurchase rate unchanged at 7,0 per cent per annum. The MPC is aware that some of the favorable factors that contributed to this decision could reverse quickly, and remains ready to react appropriately to any significant change in the inflation outlook.

CPI inflation is 6.3%, with food at a pace slightly above 11.0% and core CPI at 5.6%.  Officials do not expect inflation to fall into the 3-6% target range until a year from now.  Expected inflation is hovering at the top of the target range. Following a severe downturn, South African growth is projected to be zero this year, 1.1% next year, and 1.5% in 2018.  Yet another concern is the rand despite some recent appreciation: ” the rand remains vulnerable to possible “risk-off” global scenarios; changes in US monetary policy expectations; and domestic concerns including the possibility of ratings downgrades later in the year.”

To counter rising inflation fueled by rand depreciation, South African Reserve Bank officials engineered six increases between January 2014 and March 2016 of their policy interest rate, lifting such to 7.0% from 5.0%.  The deciding factor behind the latest decision not to tighten further appears to have been a slightly better inflation profile:

The Monetary Policy Committee remains concerned about the weak economic growth outlook and the medium term inflation trajectory which remains outside the target range of 3 to 6 per cent until the second half of next year. Nevertheless there have been some improvements in the near term inflation prospects following successive downside surprises. This is also the case for core inflation, where the expected breach of the upper end of the target range is now less protracted. While the risks to the inflation forecast are assessed to remain on the upside, these risks have moderated somewhat.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.




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