Rand a big risk in 2017 – Sarb

Lesetja Kganyago, SA Reserve Bank Governor, says the bank would like a more sustained improvement in inflation outlook before cutting rates, leaving the repo rate at 7% this week.

The economy’s inflation outlook remains on the upside, mainly because no one knows what the rand will do next, he said. Equally, growth prospects remain bleak, with political uncertainty reining in consumer and corporate spending, hindering an uptick in employment.

Since the previous MPC meeting the inflation outlook’s improved, due to further appreciation of the rand exchange rate, after a “benign market reaction to the US Fed monetary policy tightening” and significant narrowing in SA’s current account deficit.

CPI inflation is seen averaging 5.9% in 2017 (6.2% before), 2018 at 5.4% (5.5%), and 2019 at 5.5%. Expected improvement should come through as the rand settles down.

Food price inflation is at 10%, moderating from December’s 12% and is expected to average 7.4% in 2017 and 5.2% in 2018.

Thankfully, the rand’s recovery prior to the Finance Minister recall debacle is seen lowering petrol price inflation. A further downside risk comes from electricity price increases, which could turn out to be lower than the 8.0% currently in the forecast from mid-2017.”

The improving trend of the deficit on the current account’s reduced perceived vulnerability of the rand to possible capital flow reversals. “However, while significant adjustment of the current account has occurred, the deficit is not expected to remain at the level seen in the fourth quarter of last year.”

“The Bank’s forecast for GDP growth has been revised up by 0.1 6 percentage points in both 2017 and 2018, to 1.2% and 1.7%, with growth of 2.0% forecast for 2019,” Kganyago said.