SA keeps benchmark repo rate on hold but worried about inflation

The Reserve Bank kept its benchmark repo rate unchanged at 7% on Tuesday, in line with expectations, saying the near-term outlook of inflation has deteriorated while the domestic growth outlook remained constrained.

This means that the prime lending rate, which is the figure charged by banks to customers, is expected to remain at 10.5%.

While economists have cautioned against calling an end to the tightening cycle and the start of lower interest rates — especially after consumer inflation came in at 6.8% last week — they did not expect an increase.

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Speaking at the announcement, Reserve Bank governor Lesetja Kganyago pointed to a more negative outlook for the country, with lower growth prospects and higher inflation, while pointing out the tough spot consumers found themselves in with growing indebtedness.

South African futures were firmer on Tuesday as the JSE all share closed higher in response to the Reserve Bank decision to keep interest rates unchanged.

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The Bank has raised rates by 75 basis points since the start of 2015‚ and by 200 basis points since January 2014. The last rate increase was 25 basis points in March 2016‚ and followed a 50-point rise in January 2016.

SA economy poised for growth

SA’s economy will get a boost from perkier commodity prices, a benign inflation outlook, and better rains for the agriculture sector this year, a Reuters poll found on Thursday. The 27 economists in the poll suggested growth in SA would accelerate to 1.1% this year and 1.6% next year. The South African Reserve Bank (SARB) estimated GDP expanded 0.4% last year.

"Higher commodity prices in combination with lower inflation, stable interest rates and a recovery in the agricultural sector should drive 2017 growth somewhat stronger than in 2016," said Elize Kruger at NKC African Economics. Twelve of 14 economists believed that growth in SA has left the slow expansion trap seen in previous quarters.

SA’s growth has been choppy in the past two years, with negative quarterly performances three different times on an annualised basis since 2014. However, KPMG’s Christie Viljoen says positive growth is expected, though it will be very low.