Cape Town - At its first meeting for the year, the South African Reserve Bank's (SARB's) monetary policy committee (MPC) decided to leave the repo rate unchanged at 6.75%.
The repo rate is the interest rate at which the SARB lends money to commercial banks. Due to the bank's decision, the prime lending rate - the rate at which banks start lending to clients - will be 10.25%.
SARB governor Lesetja Kganyago, speaking in Pretoria, said while the country's economic growth outlook has become more positive, it was still fragile.
In his view, the upcoming budget in February would be key in determining any further sovereign credit downgrades. He cautioned that another ratings downgrade by an international ratings agency would impact the rand and long bond yields.
Kganyago said he expected wage pressure to continue on inflation, but at the same time he pointed out that the outlook for household consumption expenditure has improved. It is expected to be the main driver of GDP growth in the medium term.
"Domestic growth is showing some signs of improvement although off a low base," he said. As for the rand, Kganyago said it was expected to remain sensitive to political developments in the near term.
The rand strengthened to R12.21/$ is the wake of his speech, after opening the day at R12.29 to the greenback.
The last time the bank changed the repo rate was at its MPC meeting in July 2017, when it cut it by 25 basis points. This was in light of the improved inflation outlook and the deteriorating growth outlook, Kganyago said at the time.
The MPC kept rates on hold in September and again in November, as it anticipated a risk to the rand following the outcomes of the ANC elective conference held in December.
In the days following the ANC conference the rand rallied, due largely to the fact that Deputy President Cyril Ramaphosa was chosen as the new ANC leader, beating his opponent Nkosazana Dlamini-Zuma.
The local currency has continued to firm into January.
This week it hit a three-year high, testing R12.20/$ to the US dollar driven mostly by a weaker greenback, according to analysts.
Ahead of the MPC's rate announcement, Investec chief economist Annabel Bishop was of the view that the scope for significant rate cuts is limited, given the pressure on the inflation outlook for 2019.
"The SARB has communicated that, while inflation is lower currently, it could well be temporary and a reduction in long-run inflation expectations would provide a better support for lower interest rates," said Bishop.
At the last MPC meeting in November 2017, the MPC’s model showed repo rate hikes of 75 basis points in total by the end of 2019, Bishop pointed out.
In an economic outlook report for 2018, Momentum Investments economist Sanisha Packirisamy took a more optimistic view, and explained that inflation is expected to remain “comfortably” within the 3% to 6% target band, creating room for monetary policy easing in 2018.
“Momentum Investments only sees space for up to 50 basis points worth in interest rate decreases (two cuts of 25 basis points each, at the most), given the medium-term outlook for inflation and political uncertainty, as the 2019 election draws near,” she said.
The developments in the country over the past two months have helped increase the likelihood of rate cuts, Bloomberg reported this week. Thirteen out of 19 economists surveyed by Bloomberg expected the Reserve Bank to keep rates unchanged at Thursday’s meeting.
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