South Africa ups repurchase rate to 5¾% as growth outlook deteriorates

By Toni Weeks

San Luis Obispo, Calif., July 17 – South African Reserve Bank’s Monetary Policy Committee decided to raise the repurchase rate by 25 basis points to 5¾% at its meeting on Thursday, according to a bank notice. The bank last increased the rate by 50 bps on Jan. 30.

Since the last recent policy meeting, the committee said that the economic growth outlook has deteriorated against the backdrop of protracted strike action in the mining and manufacturing sectors. The economy contracted in the first quarter of 2014, and the growth outlook for the rest of the year remains subdued amid low business confidence.

Furthermore, inflation has breached the upper end of the target range, driven primarily by the exchange rate depreciation and rising food prices. Wage settlements and demands have added to the upside risk of the inflation outlook.

The committee reported that year-on-year CPI inflation rate for all urban areas measured 6.6% in May, up from 6% in March and 6.1% in April. Food and non-alcoholic beverage price inflation has been pegged as the main driver of the acceleration.

According to the bank, the marginal improvement in its forecast of headline inflation at the last meeting has basically been reversed. Inflation is now expected to average 6.3% in 2014 instead of the previous prediction of 6.2%, with a peak of 6.6% in the fourth quarter. The inflation forecast for 2015 is now 5.9%, increased from 5.8%, and for 2016 it is 5.6% from 5.5%.

Core inflation is expected to average 5.6% in 2014 and 5.7% in 2015, unchanged from the last meeting, the bank said.

The exchange rate of the rand continues to pose an upside risk to the inflation outlook. Since the previous meeting, the rand has depreciated by 2.6% on a trade-weighted basis, the bank said.

The committee said it remains concerned about weak growth, widening output gap and the negative employment outlook. It is also increasingly concerned about the inflation outlook and the further upside risks to the forecast. The bank noted that it faces an increasingly difficult dilemma of rising inflation and slowing growth. It has, however, decided to continue on its gradual normalization path by raising the repurchase rate.

According to the committee, the monetary policy stance remains supportive of the domestic economy and, as before, any future moves will be gradual and highly data dependent.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.