No change in repo rate

SA’s central bank kept its benchmark repo rate at 6.75% yesterday, in line with expectations, citing increased risks to inflation posed by currency weakness, possible credit downgrades and political jostling.

“The lead-up to the ANC elective conference and its uncertain outcome is also likely to continue to weigh on the currency,” governor Lesetja Kganyago said.

Kganyago said weak fiscal forecasts in the national budget announced in October had also reduced scope for rate cuts. Further comments by Kganyago:

Growth

“The domestic growth outlook remains subdued but positive. Both consumer and business confidence remain low and are also likely to be affected by political developments in December.”

The forecast for GDP growth has been revised up marginally to 0.7% for 2017, but revised down to 1.2% and 1.5% for 2018 and 2019, from 1.3% and 1.7% previously.

Inflation

“Since the previous meeting of the monetary policy committee (MPC), upside risks to the inflation outlook have increased, mainly due to higher oil prices and a weaker rand exchange rate.”

“Despite a deteriorating in the forecast, inflation is expected to remain within the target range.”

The average forecast for 2017 is unchanged at 5.3%, but has been revised upward for 2018 and 2019 to 5.2% and 5.5%, from 5.1% and 5.4% previously.

Rand

“The lead-up to the ANC elective conference and its uncertain outcome is likely to continue to weigh on the currency.”

“Domestic event risks, including rating agency reviews and the economic policy implications of the ANC electoral conference, are likely to dominate rand movements over the coming weeks.”

The rand has depreciated 3.6% against the US dollar since the last MPC announcement.

Downgrades

“Downgrades of domestic currency debt to subinvestment grade could lead to South African government bonds falling out of key indices which require investment grade. Such an event could trigger significant sales of domestic bonds by nonresidents.”

“Ratings reviews are expected, but the extent to which any possible downgrades may already be priced in remains uncertain.”

Petrol price

A weaker exchange rate and higher prices have resulted in an increase in domestic petrol prices by R1 per litre since September. The underrecovery suggests an increase in the region of 70 cents per litre is likely in December.