Pretoria – The Reserve Bank’s Monetary Policy Committee (MPC) has kept the repo rate unchanged at 7% per annum.
“Given improvements in the inflation forecast, the weak domestic economic outlook and the assessment of the balance of risks, the MPC has unanimously decided to keep the repurchase rate unchanged at 7% per annum,” Governor Lesetja Kganyago said on Thursday.
At its second last meeting of the year, the MPC expressed concern about the overall inflation trajectory, which remains in the upper end of the inflation target range.
“The MPC assesses the risks to the inflation forecast to be more or less balanced at this stage. The current level of the rand is stronger than that implicit in the forecast, and, in conjunction with continued low levels of pass-through from the rand to inflation, the risks are assessed to have moderated somewhat,” said the Governor.
However, some of the positive factors impacting on the rand may be temporary, and the rand remains vulnerable to both domestic and external shocks.
Since the previous meeting of the MPC in July, the rand traded in the range of R14.73 and R13.28 against the US dollar and has appreciated by 6.3% against the US dollar.
The MPC said other major risks to the country’s inflation outlook relate to food prices, with the bank’s forecast still expecting them to peak in the final quarter of this year.
The bank still expects food price inflation to reach a peak in the fourth quarter of this year at around 12.3%.
“The future trajectory of these prices will be highly dependent on the normalisation of rainfall in the coming months. Favourable weather patterns could see food price inflation falling faster than that implicit in the forecast,” said Kganyago.
Despite a positive growth surprise of 3.3% in the second quarter of 2016, the domestic economy remains weak, said the central bank.
The Reserve Bank announced that it has revised upward the forecast for economic growth for 2016 to 0.4%.The forecasts for the next two years have been increased marginally by 0.1 % to 1.2 % and 1.6 % respectively.
The bank noted that while growth was more favourable in the second quarter, data suggests that the improvement is unlikely to be sustained in the third quarter.
Data released by Statistics South Africa on Wednesday showed that the annual Consumer Price Index (CPI) eased to 5.9% in August 2016.
On Thursday, the bank said its latest inflation forecast has improved with inflation now expected to peak at 6.7% in the fourth quarter of 2016, compared with 7.1 % previously. Inflation is expected to average 6.4 % in 2016 and 5.8 % in 2017.
The forecast for 2018 is unchanged at an average of 5.5%.
When coming to the petrol price, the bank expects it to rise in October following two consecutive months of price declines totalling R1.17 per litre.
“The MPC is of the view that should current forecasts transpire, we may be close to the end of the tightening cycle. The committee is aware that a number of the favourable factors that have contributed to the improved outlook can change very quickly resulting in a reassessment of this view,” said Kganyago.