Lesetja Kganyago. Picture: PUXLEY MAKGATHO
Lesetja Kganyago. Picture: PUXLEY MAKGATHO

The SA Reserve Bank’s monetary policy committee (MPC) increased the repo rate by 25 basis points on Thursday, for the first time in two years.

“Since the previous meeting of the MPC, the near-term inflation outlook has improved; however, the longer-term risks to the inflation outlook remain elevated. The weaker exchange rate and the impact of higher oil prices have contributed to increasing inflation since March 2018. At the same time, domestic growth remains weak,” Reserve Bank governor Lesetja Kganyago said.

Analysts were at odds over what the MPC’s move would be. Of the 21 economists in a Bloomberg survey, 11 predicted that the repurchase rate would be increased to 6.75% and the rest expected no change. Analysts haven’t been this divided on a rate decision since March 2016, which is also the last time the Bank hiked rates.

“The approach of the MPC is to look through the first-round effects and focus on the possible second-round effects of supply-side shocks. However, shocks of a persistent nature such as the extended periods of currency depreciation, elevated oil prices and multi-year electricity price increases make it difficult to disentangle these first- and second-round effects,” he said.

The bank adjusted its consumer inflation forecasts as follows:

  • 2018: 4.7%, from 4.8% at the September meeting
  • 2019: 5.5%, from 5.7% in September; and
  • 2020: no change at 5.4%.

It is expected to peak at 5.6% in the third quarter of 2019.

The announcement will knock consumers and will come as a blow to President Cyril Ramaphosa, who is struggling to boost the battered economy and make a dent in the unemployment rate, which is nearing 30%.

Long-term risks to the inflation outlook include tighter global financial conditions, a weaker exchange rate, a high wage rate, oil prices and rising electricity and water tariffs.

“However, demand pressures are still not assessed to pose a significant risk to the inflation outlook,” Kganyago said.

The latest retail sales, manufacturing production and mining figures have all come in below the market consensus, highlighting the fragility of SA’s economic recovery.

“The MPC assess the risks to the growth forecast to be moderately on the downside. As previously highlighted, the committee remains of the view that current challenges facing the economy are primarily structural in nature and cannot be solved by monetary policy alone,” he said.

The Bank adjusted its growth forecasts to:

  • 2018: 0.6% from 0.7% forecast at the September meeting;
  • 2019: 1.9%, from 1.9% in September; and
  • 2020: no change at 2%.

“Prudent macroeconomic policies are essential to ensuring that growth is sustainable and that the economy is more resilient to shocks.”

While inflation has remained firmly in the 3-6% target band set by the Bank, the MPC has made it clear that they would prefer inflation anchored to the 4.5% mid-point.

The Bank also came under pressure from the IMF earlier this week to maintain inflation at that mid-point with a warning not try to boost an economy weakened by structural constraints.

“The MPC noted the rising inflation trajectory which, while remaining within the target range, continues to deviate from the mid-point of the target range,” he said.

Since the last MPC, the rand has appreciated about 2% while oil price have declined 20% all in the context of a weak growth environment. 

“Over the medium-term, it is likely that the rand, along with other emerging-market currencies, will remain volatile,” Kganyago said.​

The rand gained about 10c against the dollar, or 0.6% in the immediate aftermath of the announcement, extending earlier gains.

After trading at about R13.83 to the dollar as Kganyago began speaking, the local currency reached an intraday best of R13.729 to the dollar, a two-month high.

At 3.25pm the rand was 1.4% firmer against the dollar at R13.737, 1.24% against the euro at R15.6702 and 0.62% against he pound at R17.6898. The euro was 0.17% firmer at $1.1405.