South African Reserve Bank

May 22, 2015

In a new statement from South African monetary authorities, officials express mounting doubts that the 5.75% repo rate is sufficiently restrictive to keep inflation in the medium term below the 6% target ceiling.

Although the upward revision of the inflation forecast was relatively small, the persistence of medium term inflation at elevated levels and the deteriorating risks to the outlook are an increasing concern to the MPC. While currently the breach is expected to be temporary, the longer term trajectory is close to the upper end of the target range, and the upside risks make this trajectory vulnerable to any significant changes in inflation pressures.

The MPC has decided to keep the repurchase rate unchanged at this meeting. Four members of the committee favoured an unchanged stance while two favoured a 25 basis point increase. The deteriorating inflation outlook suggests that this unchanged stance cannot be maintained indefinitely. The MPC will continue to closely monitor the evolution of inflation expectations and other factors that could undermine the longer term inflation outlook and stands ready to act when appropriate.

While South Africa faces a fragile growth outlook, concern has risen among other things regarding the inflationary impact of rand depreciation thus far and the potential for the currency to decline more as Fed policy normalization begins.

The SARB’s repo rate has been 5.75% since increases of 50 basis points in January 2014 and 25 bps in July of last year.  Previously between December 2008 and July 2012, a series of reductions trimmed the repo rate from 12.0% all the way to 5.0%.  500 basis points of that relief was provided by August 2009.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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