SA repo rate left unchanged

The South African Reserve Bank's Monetary Policy Committee (MPC) has left the repo rate unchanged at 7%. Five members of the MPC voted for an unchanged rate, while one preferred a 25 basis-point reduction.

Lesetja Kganyago, SARB governor, said the MPC believed the country might be at the end of the tightening cycle. However, the bank would like a more sustained improvement in inflation outlook before cutting rates.

“Overall, the MPC assesses the risk to the inflation outlook to be moderately on the upside, mainly due to the high degree of exchange rate uncertainty. The MPC sees no evidence of significant demand pressures impacting on inflation. The growth outlook remains disappointing, and the MPC is concerned that increased political uncertainty could impact negatively on private sector investment and household consumption expenditure, and further undermine employment growth. The risks to the growth outlook are therefore assessed to be on the downside,” he said.



Inflation

Since the previous MPC meeting the inflation outlook's improved, due to further appreciation of the rand exchange rate, after a “benign market reaction to the US Fed monetary policy tightening” and significant narrowing in SA's current account deficit.



Rand

The rand exchange rate has been relatively resilient in the past few months. “The rand has depreciated significantly in response to increased domestic political uncertainty and the exchange rate has re-emerged as an upside risk to the inflation outlook.”

Maura Feddersen, economist at KPMG South Africa, says local consumers will be watching closely to see when the MPC may adopt a more accommodative monetary policy stance. “In view of rising levels of household debt, a higher tax burden, low employment growth and weak credit extension, consumers are desperate for lower interest rates and easing pressure on debt servicing costs in months to come.

“In his March statement, governor Kganyago noted the SARB now expects headline inflation to return to within the target range in the second quarter of 2017 compared to the fourth quarter previously. Although the inflation outlook has thus improved since January's MPC meeting, recent domestic uncertainty renews pressure on the currency and reduces the SARB's room to lower interest rates in 2017. Looking ahead, the MPC currently anticipates holding the repo rate stable at 7% throughout this year and next, until inflation returns comfortably to within the target range,” says Feddersen.

“It remains an open question whether the positive factors supporting renewed growth – such as exports and agricultural recovery from the drought, will outweigh the negative ones outlined in the MPC statement,” says NWU School of Business and Governance economist Professor Raymond Parsons.

“Presently the SARB's leading economic indicators show a welcome positive trend. Taking the balance of risks into account, therefore, the MPC decision to leave interest rates unchanged for the time being is the right one, and confirms the importance of resolving the present political impasse in SA as soon as possible,” he adds.

The unchanged repo rate provides comfort for those wanting to purchase a home and those with existing mortgages, says Pam Golding Property group CEO Dr Andrew Golding.

“Furthermore, the prognosis seems to be that the repo rate is likely to remain stable for the remainder of the year, with the possibility of an interest rate cut in 2018 or even at the end of 2017. [This] is particularly welcome news for consumers who are feeling the pinch of ever-rising costs, a factor which is most evident among those gaining a foothold or already on the lower rungs of the residential property ladder, which brings us to another important point.”

MONEYWEB