Reserve Bank keeps repo rate unchanged at 6.5%

The South African Reserve Bank’s Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 6.5%.

The decision was unanimous, based on a more balanced inflation outlook for the country, but amid continued economic risks.

According to Reserve Bank governor, Lesetja Kganyago, since the July meeting of the MPC, economic indicators confirm weaker global economic conditions and low inflation.

“Central banks in advanced economies have provided more monetary accommodation, helping to ease global financial conditions. Downside risks from escalating trade and geo-political tensions remain pronounced,” he said.

In the second quarter of this year, South Africa’s GDP rebounded from the contraction experienced in the first quarter, but economic activity levels still remain weak. Monthly inflation has been around the mid-point of the inflation target range, as food and services inflation remains subdued.

The year-on-year inflation rate, as measured by the consumer price index (CPI) for all urban areas, was 4.3% in August (up from 4.0% in July).

The forecast of GDP growth for 2019 remains unchanged at 0.6%. The forecasts for 2020 and 2021 have decreased to 1.5% (from 1.8%) and 1.8% (from 2.0%), respectively, due to revisions to global growth and domestic potential growth.

The overall risks to the inflation outlook are assessed to be largely balanced. Demand side pressures remain subdued and food, wages and rental prices are expected to increase at moderate rates.

Electricity, food and fuel price inflation continue to shape the near and medium-term trajectory of headline inflation, Kganyago said.

Fuel price inflation is expected to average 2.4% in 2019 and to peak at 11.8% in the first quarter of 2020. While food price inflation has generally surprised on the downside, it is expected to peak at about 6.0% in the third quarter of 2020. Electricity prices came out higher than expected in August, at 11.8%, but remain in line with the forecast.

“Monetary policy actions will continue to focus on anchoring inflation expectations new the mid-point of the inflation target range in the interest of balanced and sustainable growth,” the governor said.

“In this persistently uncertain environment, future policy decision will continue to be highly data dependent, sensitive to the assessment of the balance of risks to the outlook, and will seek to look through temporary price shocks.”

The hold on rates has been met with disappointment from analysts, with the struggling real estate sector especially critical of the move.

According to the Seeff Property Group, South Africa has only had one 25bps rate cut  in 2019, which is simply not enough.

“There is ample support for a further rate cut. The second quarter GDP growth of 3.1% was better than expected and inflation, despite slightly up to 4.3% in August, remains fairly benign and well within the bank’s target range of 3%-6%,” the group said.

“The SA economy is struggling, and sentiment and lack of political confidence in the market remains worryingly low. A cut in the interest rate would assist, especially since business confidence is at its lowest point in 20 years.”

This sentiment was echoed by Pam Golding properties, adding that whole the repo rate remaining unchanged is positive in terms of stability, it is unlikely to stimulate increased activity in economy.

“What is needed right now is a meaningful confidence boost to offset the global and local macroeconomic and socio-political factors impacting on the market and jump-start the muted economy,” the group said.

South Africa’s cabinet is holding a special meeting Thursday to discuss a draft plan formulated by the National Treasury to revive the economy, Bloomberg reported.

The Treasury “told Cabinet that more than 700 responses were received to that document,” Jackson Mthembu, a minister in the presidency, told reporters in Cape Town. “We are discussing it so it can be turned into an economic strategy for the country.”

Read: South Africa’s inflation rate rose more than forecast in August

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Reserve Bank keeps repo rate unchanged at 6.5%