By CentralBankNews.info
South Africa’s central bank left its benchmark repurchase rate at 6.75 percent, as expected, describing this decision as “prudent” during a time of a”high degree of uncertainty” and downside risks to economic growth and inflation.
Although the South African Reserve Bank’s (SARB) latest Quarterly Projection Model (QPM) implies an increase in the repo rate of 75 basis points by the end of 2019, Governor Lesetja Kganyago stressed the bank’s monetary policy committee is not committed to such a rate path and its decisions may diverge from this path it as it weighs the risks and trade-offs from one meeting to the next.
Despite a backdrop of favorable global growth, South Africa is facing the immediate risk that ratings agencies may downgrade it to sub-investment grade due to a a rapidly deteriorating fiscal position from low tax revenues, a negative reaction to the government’s medium-term budget and speculation over free higher eduction.
A ratings downgrade could to lead to sovereign bonds falling out of key emerging market indices, triggering “significant” sales of bonds by non-residents, and putting pressure on the exchange rate of the rand and long-term bond yields, boosting inflation and thus changing the likely path of monetary policy.
Kganyago also said international oil prices were now of increasing concern, posing an upside risk to inflation along with the risk of a sizable increase in electricity tariffs by Eskom.
He added stronger global growth is pushing up oil prices, which could boost global inflation and lead to a faster pace of monetary policy tightening in advanced economies, affecting capital flows to emerging markets, such as South Africa.
In an update to its forecast, SARB kept its 2017 headline inflation outlook steady at 5.3 percent but raised the 2018 forecast slightly to 5.2 percent from a previous 5.1 percent and the 2019 forecast to 5.5 percent from 5.4 percent.
The main upside stems from a weaker rand in 2018, higher oil prices and higher average wage growth that is offsetting favorable food prices.
In 2016 the inflation rate was 6.3 percent and in October it eased to 4.8 percent from 5.1 percent.
The forecast for the repo rate implies three hikes of 25 basis points each by the end of 2019, with the rate rising to 7.5 percent that year, up from the previous forecast of 7.1 percent.
“The domestic growth outlook remains weak, continuing its deviation from the generally more favorable global pattern,” Kganyago said.
The economy is seen expanding by 0.7 percent this year, up from 0.3 percent in 2016 and 0.6 percent previously forecast. In the second quarter of this year Gross Domestic Product grew by an annual rate of 1.1 percent, up form 1.0 percent in the first quarter.
For 2018 the economy is forecast to expand 1.2 percent, down from 1.3 percent, and in 2019 by 1.5 percent, down from 1.7 percent previously forecast.
After rising steadily this year, the rand has come under recent pressure but was still trading at 13.9 to the U.S. dollar today, little changed from 13.7 at the start of this year.