Reserve Bank keeps rates unchanged

South African Reserve Bank (Sarb) Governor Lesetja Kganyago has announced that the repurchase rate will remain unchanged at 6.75%, as was widely anticipated.

The repo rate is the rate at which the central bank lends money to commercial banks. The prime lending rate, the interest charged by banks to clients, will remain at 10.25%.

Kganyago said that the rand exchange rate responded strongly to the outcome of the ANC elective conference, and since then has traded in a range of between R12.25 & R12.50 against the US dollar. This is in sharp contrast to the low of R14.47 a month earlier.

SARB noted that the average inflation forecast for 2017 is unchanged at 5.3% but the average forecast has been revised downwards for 2018 & 2019 to 4.9% and 5.4% respectively from 5.2% & 5.5% previously. Inflation is expected to average 5.5% in the final quarter of 2019, it said.

All but six of the 19 economists surveyed by Bloomberg forecast the MPC will leave its benchmark rate unchanged at 6.75%. Five predict a quarter percentage point cut and one, Abri du Plessis at Gryphon Asset Management, said the committee will lower the rate by half a percentage point.

Craig Pheiffer, chief investment strategist, Absa Stockbrokers & Portfolio Management, said: “There were no surprises today when the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) delivered its first monetary policy statement for the year.

“Few central bank watchers were expecting the MPC to adjust rates this time around with two key risk events still on the horizon. As was widely expected, the SARB detailed an improved inflation outlook on the back of the stronger rand and the lower than expected electricity price tariff awarded to Eskom by NERSA.”

Pheiffer said that the low point in the current inflation cycle is still expected in the first quarter of the year with marginally higher inflation in the ensuing years (but contained within the 3-6% target range).

“Despite this more positive outlook on the course of inflation over the forecast period, the SARB was cognisant of the risk posed to inflation, via the currency, from both the Moody’s sovereign credit rating announcement next month as well as the National Budget to be delivered on 21 February.

“Both of these events have the potential to move the currency markedly (both up and down) and any big swings in the currency would necessitate further adjustments to the inflation outlook. With these events imminent, the SARB believed it prudent to maintain the interest rate status quo but, like any good central bank, it continued to highlight the risks to the positive inflation outlook.”

Read: A rate cut is back on the table as rand hits strongest levels since 2015

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Reserve Bank keeps rates unchanged