The SA Reserve Bank has raised the repo rate by 25 basis points, to 3.75%. This is the first rate hike in three years. Three members of the Monetary Policy Committee (MPC) preferred an increase, with two preferring rates to remain steady, Reserve Bank Governor Lesetja Kganyago said during a briefing on Thursday.
While the MPC expects inflation to stay close to the mid-point over the forecast period, inflation risks have increased, he added. Risks to the short-term inflation outlook are expected to be on the upside.
Global producer price and food price inflation continued to surprise higher in recent months and could do so again. Additionally, oil prices have increased sharply, with current prices well above the bank’s forecasted levels for this year.
“Given the moderate medium- and long-term inflation projections set out above, a weaker currency, higher domestic import tariffs, and escalating wage demands present additional upside risks to the inflation forecast,” Kganyago said. Headline inflation has been revised higher from 4.4% to 4.5% for 2021.
The forecast for core inflation is unchanged at 3% for 2021. While the domestic economy grew strongly in the first half of 2021, the second half of the year is expected to show mixed results,” Kganyago said.
The bank revised the growth outlook from 5.3% to 5.2%. The revision is due to a larger negative effect on output than was previously estimated from the July unrest and other factors. Third-quarter growth is expected to be -2.5%, compared to -1.2% previously.
GDP for the fourth quarter is expected to be 2.6%, compared to 1.6% previously. Overall GDP for 2021 still reflects a “healthy bounce-back” from the economic effects of the pandemic. The July unrest, the pandemic and ongoing energy supply constraints are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns,” said Kganyago.
Load shedding will also continue to constrain investment. “The faster vaccine rollout presents some upside risk to the growth outlook,” he said. Kganyago explained that as load shedding creates uncertainty for investors, who need assurance that they will continue to have electricity going forward, for them to make investments.
Risks to medium-term growth, however, are expected to be on the downside.
The Reserve Bank also revised down the projection for the current account surplus, from 4.6% to 3.8% of GDP in 2021. Recent movements in commodity and oil prices suggest a smaller trade surplus, he explain. The Reserve Bank now expects a current account deficit of 0.6% of GDP in 2022, as opposed to a surplus of 0.7% of GDP.
Following the rate announcement Treasury ONE noted that initially the rand traded stronger, strengthening from R15.65/$ to R15.60/$. But it then lost 15 cents later to trade around R15.75 to the greenback. TreasuryONE noted that there is currently a broad risk off mode to emerging market currencies in the market.
Deputy Reserve Bank Governor Fundi Tshazibana said that the rand is influenced by a number of factors – both domestic and external. “The rand is also used as a proxy currency for other emerging market countries. So if there are events that market participants are concerned about in other emerging market currencies, that would have an impact on the rand,” she said
Source: eNCA
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