SA Reserve Bank Keeps Repo Rate Unchanged At 6.75%

The South African Reserve Bank's Monetary Policy Committee has decided to hold interest rates, with the repo rate set at 6.75%.

Reserve Bank governor Lesetja Kganyago delivered the decision in a statement on Thursday (28 March 2019).

According to Kganyago, since the previous meeting of the Monetary Policy Committee, global growth concerns have increased, with particular weakness visible in some of our major trading partners. Domestically, electricity constraints, combined with weakness in business and consumer confidence, weigh on the forecast.

"While inflation continues to show near-term downside surprises, the medium-term outlook is impacted by higher energy tariffs and rising food and fuel prices," he said.

The year-on-year inflation rate as measured by the consumer price index (CPI) for all urban areas was 4.1% in February (up from 4.0% in January). Goods price inflation was 3.0% (up from 2.8% in January), while services price inflation remained at 5.2%.

The bank's measure of core inflation, which excludes food, fuel and electricity, was unchanged in February at 4.4% for the fourth consecutive month. Producer price inflation for final manufactured goods increased to 4.7% in February from 4.1% in January.

Kganyago said that previous MPC statements have highlighted the risks to the forecast presented by volatile oil prices and food price surprises. In light of recent developments, the assumptions for Brent crude oil in the QPM were revised up by US$2 per barrel from US$62 to US$64 for 2019. The assumptions for 2020 and 2021 are unchanged at US$65.

Fuel taxes and levies announced in the 2019 Budget have been included in the forecast.

The turning point for food price inflation has also been difficult to predict due to lower than expected meat prices and weak demand. Food price inflation is expected to bottom out in the first quarter of 2019 and to peak at 5.9% in the second quarter of 2020, he said.

The forecast also takes into account the recent electricity tariff increases announced by the National Energy Regulator of South Africa. The assumption for electricity price inflation, which takes into account municipal price adjustments, has increased from 12% to 13% for 2019/20 and from 6% to 9% in 2020/21.

"Higher food, fuel and electricity prices are expected to lift inflation over the medium term. However, this is expected to be offset by lower core inflation as unit labour costs and inflation expectations moderate," the governor said.

The forecast for core inflation is lower at 4.8% in 2019 (down from 5.0%), 4.9% in 2020 (down from 5.1%) and 4.5% in 2021 (down from 4.8%).

The SARB now expects GDP growth for 2019 to average 1.3% (down from 1.7% in January). The forecast for 2020 is 1.8% (down from 2.0%), rising to 2.0% for 2021 (down from 2.2%).

"This results from the bigger than expected slowdown in the global economy, declines in business confidence, potential supply side disruptions from load shedding and growing pressure on household disposable income," Kganyago said.

Against this backdrop, the MPC unanimously decided to keep the repurchase rate unchanged at 6.75% per year, he said, adding that the committee continues to assess the stance of monetary policy to be accommodative.

The implied path of policy rates generated by the Quarterly Projection Model is for one hike of 25 basis points, reaching 7.0% by the end of 2019, he said.