South African Monetary Policy Committee issue update

  • 28 March 2019
  • 3430
  •  nuus

  1. As expected, the SARB left the repo rate unchanged, at 6.75%. The decision was unanimous, with all committee members preferring to keep rates on hold.
  2. The dovish tone of the statement indicates that the SARB is likely to keep rates on hold for longer. With CPI expected to remain within the 3%-6% target band for the next three years and domestic growth subdued, as well as easing global financial conditions, takes pressure of the SARB to maintain a tightening bias. We continue to expect the SARB to keep rates unchanged for longer.
  3. The tightening suggested by the QPM is for one increase of 25bp in 2019 – the same as at the January meeting.  The one hike will take the repo rate to 7.0%, remaining flat to the end of 2021. The QPM’s tightening is slightly puzzling, given that the risks to the inflation outlook are assessed as balanced, while the output gap is wider and risks to growth are tilted to the downside.
  4. The SARB sees risks to the inflation outlook as evenly balanced, despite recent volatility in the rand. Upside risks stem from rising administered prices (electricity and water tariffs), and domestic food prices in the outer years, as well as higher international oil prices. These are offset by downside risks arising from lower global inflation and accommodative monetary policy in advanced economies.
  5. Headline inflation forecasts for 2019 and 2020 were unchanged, at 4.8% and 5.3%, while the 2021 forecast was revised lower to 4.7% from 4.8%. Headline inflation is expected to peak at 5.7% in 1Q20, with a terminal rate of 4.5% in 2021.
  6. The growth forecast was revised to 1.3%, 1.8% and 2.0% in 2019, 2020 and 2021, from 1.7%, 2.0% and 2.2% previously. The output gap is expected to widen in the near term and remain negative to the end of the forecast period. This indicates that demand-side inflationary pressures are likely to remain benign in the medium term. This is further evident in the core inflation forecast, which was revised lower.
  7. Market impact: The rand opened the day at R14.5993/USD and depreciated intraday by 0.7% to R14.7118 after the Governor announced in the MPC statement that the SARB will keep rates on hold. The R186 was at 8.724% after the announcement and decreased further to 8.70% towards the end of the Q&A session.

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