South African Reserve Bank Repo Rate Raised for First Time in a Year

July 23, 2015

A 25-basis point increase in SARB’s repo rate to 6.0% was the first change since two increases in 2014 of 50 basis points in January followed by 25 bps in July.  South Africa is struggling with both low growth and rising inflationary pressure.  Although total inflation is currently below target, a released statement projects a spell of above-target inflation and observes that expected inflation has edged higher.  Today’s action is explained in the context of a normalization process from a 30-year low of 5.0% that prevailed form July 2012 until the start of 2014.  It is also characterized as a preemptive strike to ensure that rand appreciation doesn’t entrench a higher level of core inflation.

The inflation forecast has deteriorated slightly since the previous meeting, notwithstanding the lower-thanexpected outcome in June. Headline inflation is expected to breach the upper end of the target range during the first two quarters of next year, while upside risks posed by the exchange rate have increased…  The rand, along with a number of other emerging market currencies, has been particularly sensitive to changing global risk perceptions relating to the Greek crisis, the volatility in the Chinese equity markets, declining commodity prices and expectations of the start of US monetary policy tightening…. The rand remains a significant risk factor to the inflation outlook given the vulnerability of the rand and long bond yields to possible US interest rate increases, as well as a deterioration in South Africa’s terms of trade…. The MPC is cognisant of the fact that domestic inflation is not driven by demand factors, and the outlook for household consumption expenditure remains subdued. Economic growth remains subdued, constrained by electricity supply disruptions and low business and consumer confidence and the risks to the outlook remain on the downside. However, as emphasised previously, we have to be mindful of the risk of second-round effects on inflation, and the committee is concerned that failure to act against these heightened pressures and risks will cause inflation expectations to become entrenched at higher levels.

Between December 2008 and August 2009, the repo rate was cut to 7% from 12%, and an additional 200 basis points was lopped off by July 2012.  The next policy meeting is on September 23rd.

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



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