South African Reserve Bank Retains 7.0% Repo Rate

May 25, 2017

SARB’s repo rate had been raised in six steps to 7% from 5% between January 2014 and March 2016. The latest 5-1 voting decision not to change the 7% level has one dissenter, who as at the prior meeting favored cutting the rate to 6.75%. Although latest inflation readings were unexpectedly low, upside risks namely in the form of ratings downgrades and the associated vulnerability of the rand persist, and officials did not revise projected 2019 inflation downward.

Today’s statement argues for a cautious approach to loosening policy.

The outlook for the rand, and therefore the risks to the inflation outlook, will be highly sensitive to unfolding domestic political uncertainty, as well as decisions by the credit ratings agencies. The rand could weaken significantly in the event of a worst-case ratings downgrade scenario that could result in South African government bonds falling out of the global bond indices….

Headline inflation in April was lower than expected, largely related to the pace of food disinflation. The MPC notes, however, that there have been broad-based downside surprises in core inflation as well. The current forecast does not incorporate the most recent outcomes, and further downside surprises in the coming months could impact of the starting point of the forecast and lower the entire trajectory. However, in the absence of such revisions, the MPC remains concerned about the persistence of the longer-term forecast trend at elevated levels within the target. This gives very little headroom to absorb the impact of possible adverse shocks.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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