SARB Keeps Repo Rate Unchanged - Prime Rate Remains 7%

The South African Reserve Bank (Sarb) has decided to leave the repurchase rate (repo rate) unchanged at 3.5 percent as inflation is expected to remain contained in the medium term.

This move is expected to restore consumer confidence ahead of the festive season buying after household income was severely affected by a lack of economic activity during the hard Covid-19 lockdown.

In its final rates decision for the year, Sarb's Monetary Policy Committee (MPC) decided to hold interest rates in a split decision as ewo members preferred a 25 basis point cut and three preferred to hold rates at the current level.

Sarb Governor Lesetja Kganyago today said that "risks to the inflation outlook are on the downside in the near term and balanced over the medium term''.

Kganyago said that global producer price inflation and oil prices remain low, while local food price inflation was expected to remain contained.

"Expectations of future inflation continued to moderate this year and have shifted slightly below the mid-point of the band for 2021," Kganyago said.

"The Committee notes that the slow recovery will keep inflation below the midpoint of the target range for this year and next.

"Unless risks outlined earlier materialise, inflation is expected to be well contained over the medium-term, remaining below but close to the midpoint in 2021 and 2022."

The bank's headline consumer price inflation forecast has been marked down from 3.3 percent to 3.2 percent for 2020 and 3.9 percent for 2021 from 4 percent, while 2022 is unchanged at 4.4 percent.

Similarly, core inflation is down to 3.3 percent for 2020, down from 3.4 percent, and 3.4 percent for 2021 from 3.7 percent, and flat at 4 percent for 2022.

Kganyago said that monetary policy has eased financial conditions and improved the resilience of households and firms to the economic implications of Covid-19. However, it cannot on its own improve the potential growth rate of the economy or reduce fiscal risks.

As a result, the bank now forecast that the economy will decline at least by 8 percent compared to the contraction of 8.2 percent expected at the time of the September.