Relief for South Africans as Repo rate remains unchanged

The South African Reserve Bank has unanimously decided to keep the repurchase rate unchanged at 6.5 % per annum.

This means that the prime lending rate stays at 10%.

Making the announcement on Thursday, Reserve Bank Governor Lesetja Kganyago said that the  policyis to remain accommodative and appropriate, given the current state of the economy.

“However, we note the deteriorating inflation outlook, driven mainly by supply-side factors.

“With risks and uncertainties at higher levels, we will continue to be vigilant and will not hesitate to act should there be second-round effects that take us significantly away from the midpoint of the inflation target range,” Kganyago said.

The governor said a number of key risks and uncertainties highlighted in recent meetings still persist.

“Electricity prices continue to pose a further upside risk. The growth forecast has deteriorated, and the outlook remains constrained. Demand pressures in the economy are not assessed to pose a risk to the inflation outlook.

“The Reserve Bank assesses the risks to the growth forecast to be more or less balanced. A firm commitment to credible structural policy initiatives and implementation is required to make a marked impact on employment and potential output.”

The year-on-year inflation rate, as measured by the consumer price index (CPI) for all urban areas, was 4.4% in May 2018 and accelerated to 4.6% in June.

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Goods price inflation increased to 4.2% (up from 3.5% in May), while services price inflation moderated to 4.9% (down from 5.3%).

The South African Reserve Bank’s measure of core inflation – which excludes food, fuel and electricity – declined to 4.2% in June.

Despite remaining within the target band throughout the forecast period, the SARB’s model projects an increase in headline inflation, peaking at levels closer to the upper end of the target range.

VAT impact

Thus far, the impact of the value-added tax (VAT) increase appears to have been less than anticipated.

However, the weaker rand exchange rate and the higher oil price assumptions result in a more elevated inflation trajectory, said Kganyago.

Headline inflation is now expected to average 4.8% in 2018 (down from 4.9%) before increasing to 5.6% in 2019 and decreasing again to 5.4% in 2020 (up from 5.2% in both years).

Headline CPI inflation is expected to peak at around 5.7% in the first and second quarters of 2019 before declining to 5.3% at the end of 2020.

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