PRETORIA, May 25 (NNN-SA NWS) -- The South African Reserve Bank has decided to keep its repo rate unchanged at 6.5 per cent per annum, Governor Lesetja Kganyago said Thursday.
At these levels, the MPC [Monetary Policy Committee] still assesses the stance of monetary policy to be accommodative and appropriate, given the forecast inflation trajectory and the current state of the economy," he told a media briefing after a meeting of the MPC.
However, with risks and uncertainties at high levels, the MPC will maintain its vigilance to ensure that inflation remains well within the inflation target range, and will adjust the policy stance should the need arise."
At its last meeting in March, the MPC lowered the benchmark repo rate by 25 basis points to 6.5 per cent in line with market expectation. That was the first time since July 2017 that the central bank had lowered the repo rate.
However, the MPC stated that the impact of the increase in the Value Added Tax (VAT) increase by one percentage point to 15 per cent, which came into effect in April, might still be felt in the coming months.
As for inflation, the central bank said it assessed the risks to the inflation forecast to have moved to the upside. This change is mainly due to global developments. A key uncertainty relates to the outlook for the (US) dollar, which has appreciated against most currencies. The spillover effects on emerging markets could become more severe, Kganyago said.
Oil prices also pose an upside risk to the inflation forecast, and the MPC added that greater clarity with regards to electricity tariffs was expected next month.
The National Energy Regulator of SA (Nersa) is scheduled to respond to Eskom's application for an increase in electricity tariffs in the order of 30 per cent. The bank's current assumption is for an 8.0 per cent tariff increase with effect from mid-2019, followed by another increase in 2020.
The possibility of an increase in excess of these assumptions poses an upside risk to our inflation forecast, said Kganyago.
The MPC noted that the domestic growth outlook remained challenging, although growth was still expected to outperform recent years' outcomes.
This is despite the possibility of a contraction in Gross Domestic Product [GDP] in the first quarter of this year, following negative growth in both the mining and manufacturing sectors. The Reserve Bank's forecast for GDP growth is unchanged at 1.7 per cent for 2018, but has been revised up from 1.5 per cent to 1.7 per cent for 2019, said Kganyago.
The forecast for 2020 is unchanged at 2.0 per cent.
Kganyago said the implied path of policy rates generated by the Bank's Quarterly Projection Model reflects one increase of 25 basis points during the final quarter of 2018 and a similar increase in mid-2019.
Two further increases are indicated in 2020. The generated path remains a broad policy guide, and the extent to which the MPC follows it will be determined by, among other things, the MPC's assessment of the balance of risks to the forecast.
The decision to keep the repo rate unchanged was unanimous.
Source: NAM NEWS NETWORK