A sigh of relief as Reserve Bank retains repo rate at 5.75%

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The repo rate will remain unchanged at 5.75% to support weak activity in the economy, the SA Reserve Bank Governor, Gill Marcus said. The repo rate will remain unchanged at 5.75% to support weak activity in the economy, the SA Reserve Bank Governor, Gill Marcus said.

South Africans can breathe a sigh of relief as the Reserve Bank decided to leave the repo interest rate unchanged at 5.75% on Thursday, saying the domestic growth outlook had deteriorated further.

Reserve Bank Governor, Gill Marcus made the announcement amid a domestic growth outlook that the Monetary Policy Committee described as weak.

“Despite the 75-basis-point increase so far this year, monetary policy remains accommodative, and will continue to be supportive of the domestic economy subject to achieving its primary inflation targeting objective,” Marcus said.

The repo rate – the rate at which the central bank lends money to commercial banks – was hiked by 50 basis points to 5.5% in January 2014. It was increased by 25 basis points to 5.75% in July.

Marcus said the MPC was still of the view that interest rates would normalise over time. She said domestic expenditure had “deteriorated further”. Together with continued moderation in household consumption expenditure this was indicative of the lack of demand pressures in the economy.

This meant the prime lending rate would remain at 9.25 percent.

Marcus said the MPC remained concerned at excessive wage settlements and the effect these would have on the economy.

“The MPC remains concerned about the risks of a wage-price spiral, should settlements well in excess of inflation and productivity growth become the economy-wide norm,” she said.

“Such developments could also undermine South Africa’s international competitiveness and delay the current account adjustment,” she said.

Economic growth

The bank’s forecast for gross domestic product growth for 2014 has been revised down further to 1.5% from 1.7% previously, with the risks still assessed to be on the downside.

The forecast for both 2015 and 2016 have been revised down by 0.1% to 2.8% and 3.1%, respectively.

The bank’s leading indicator of economic activity continues to trend sideways consistent with the subdued growth outlook.

Inflation

The inflation forecast for 2016 increased to 5.8% from 5.6%, mainly as a result of the revised electricity price assumption following the review of Eskom tariffs by national energy regulator Nersa.

The revised assumption makes provision for electricity price increases of 11.6% from July 2015 and again from July 2016.

The deterioration in the longer term inflation trajectory relative to the previous forecast is a result of the revised tariff increases granted to Eskom by Nersa. The view of the committee is that such relative price adjustments should not be reacted to automatically. However, while the focus of monetary policy should be on the second round effects of these increases, this is complicated given the multi-year nature of the adjustment, Ms Marcus said.

Power supply

Adding to prevailing concerns were indications from power utility Eskom that electricity supply constraints may be more severe and endure for longer than previously expected.


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