Repo Rate stays at 7%, economy still fragile

Repo Rate has been kept at 7%, with prime lending interest rate at 10.5%, Reserve Bank Governor, Lesetja Kganyago announced on Thursday..

South African Reserve Bank (Sarb) Governor, Lesetja Kganyago on Thursday announced the bank decided to keep the repo rate at 7% — with prime lending interest rate at 10.5%.

Although inflation is running higher than the Bank’s 3%-6% target — the consumer price index (CPI) rose 6.3% in June, with the outlook for economic growth further weakened.

The economy contracted 1.2% in the first quarter. Kganyago added the central bank also revised South Africa’s economy growth forecast in 2016 down to 0% from 0,6%. This is lower than the International Monetary Fund’s growth forecast of 0,1%.

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Kganyago discussed the macro-economic conditions impacting his decision prior to announcing his decision.

The Bank now expects CPI inflation to average 6.6% in 2016, from an earlier forecast of 6.7%, while the 2017 forecast was revised to 6% from 6.2% and 2018 to 5.5% from 5.2%. The Bank now sees inflation peaking at 7.1% in the fourth quarter of this year. Food inflation is expected to peak at 12%, also in the fourth quarter.

The sluggishness of the economy is one of the main concerns of international rating agencies, which will review their ratings of SA again at the end of the year, after issuing a reprieve from a drop to junk status in June.

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He said that the outlook for emerging markets had remained relatively subdued, with growth prospects remaining weak.

inflation was a concern, but the bank expected it to improve in the longer term.

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The bank took the same decision at the May meeting of its Monetary Policy Committee (MPC).

This follows two rate hikes so far this year.

In March, the bank increased the repo rate, which is the rate at which the Sarb lends money to banks, by 25 basis points to 7 percent.

In January the bank hiked the repo rate by 50 basis points to 6.75 percent.

The local currency has strengthened in recent times, also easing inflationary pressures.