South Africa raises rate to 6%, increases inflation forecast to 5%

By Tali Rackner

Norfolk, Va., July 23 – South African Reserve Bank’s Monetary Policy Committee voted four to two to increase the repurchase rate by 25 basis points to 6%, according to a news release. The change is effective as of Friday.

The committee said that the global environment has been dominated by heightened uncertainty relating to the debt crisis in Greece and the sharp decline in equity prices in China. While the tail risks from these events appear to have dissipated somewhat, uncertainties still remain. At the same time, the risks associated with financial market volatility related to the timing of the first increase in the U.S. policy rate persist.

Domestically, the growth outlook remains weak, as both the supply and demand sides remain constrained amid declining business and consumer confidence, the committee said.

The rand exchange rate has been relatively volatile and depreciated significantly since the committee’s last meeting, the release said. It remains a risk factor to the inflation outlook given the vulnerability of the rand and long bond yields to possible U.S. interest rate increases, as well as a deterioration in South Africa’s terms of trade.

The year-over-year inflation rate as measured by the Consumer Price Index for all urban areas was 4.6% in May and 4.7% in June. The latter surprised the committee on the downside, due among other things to lower-than-expected increases in food price and rental inflation, with upside pressures coming from higher gasoline prices.

According to the bank’s latest forecasts, inflation is now expected to average 5% in 2015, compared with the previous forecast of 4.9%. The forecast for the first and second quarters of next year was also revised to 6.9% and 6.1%, respectively, with a return to within the target range by the third quarter.

The forecast average inflation for 2016 and 2017 is unchanged at 6.1% and 5.7%, respectively.

© 2015 Prospect News.
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