Pretoria– The Reserve Bank on Thursday kept the repo rate unchanged at 7% per annum.
“The Monetary Policy Committee (MPC) has decided to keep the repurchase rate unchanged at 7% per annum. Five members preferred an unchanged stance, while one member preferred a 25 basis point reduction,” Reserve Bank Governor Lesetja Kganyago said.
The MPC said it remains of the view that the current level of the repo rate is appropriate for now and that the central bank is likely at the end of the tightening cycle.
“A reduction in rates would be possible, should inflation continue to surprise on the downside and the forecast over the policy horizon be sustainably within the target range.
“However, in the current environment of high levels of uncertainty, the risks to the outlook could easily deteriorate, and derail the current favourable assessment,” said Kganyago.
The repo rate was last increased by 25 basis points to reach 7% in March 2016.
Kganyago said the short-term inflation outlook has improved further since the MPC’s last meeting, with headline inflation in April coming in at 5.3%, which was lower than expected.
“The MPC notes that there have been broad-based downside surprises in core inflation as well. The current forecast does not incorporate the most recent outcomes, and further downside surprises in the coming months could impact of the starting point of the forecast and lower the entire trajectory.
“However, in the absence of such revisions, the MPC remains concerned about the persistence of the longer-term forecast trend at elevated levels within the target. This gives very little headroom to absorb the impact of possible adverse shocks,” said the Reserve Bank.
It said the rand remains as a key upside risk to the forecast.
“The rand has, however, been surprisingly resilient in the face of recent domestic developments. This is partly due to offsetting factors, particularly positive sentiment towards emerging markets and the improved current account balance.”
The Reserve Bank said a downside risk may come from electricity tariffs.
“The increases from July may be lower than the 4% now assumed, given the 1.8% guideline for municipalities published by the National Energy Regulator of South Africa (Nersa).
“However, there is a great deal of uncertainty with regard to this assumption for next year, when a new application from Eskom is likely. Currently, an 8.0% increase is assumed from July next year.”
In February, Nersa has allowed Eskom to raise tariffs by 2.2% in the 2017/18 financial year.