Sarb holds 6.75% rate

The SA Reserve Bank (Sarb) kept its benchmark lending rate unchanged for a third consecutive meeting.

The bank’s monetary policy committee maintained the repurchase rate at 6.75%.

Sarb cut the rate for the first time in five years in July to support an economy that entered its second recession in almost a decade in the first quarter of 2017 and has struggled to mount a recovery. Inflation has been inside Sarb’s target for eight months and the rand has strengthened since Cyril Ramaphosa was elected ANC president in December, spurring hope that policy uncertainty and political turbulence will dissipate.

The bank expects inflation to remain within the target band of 3% to 6% until at least the end of 2019, reaching a low of 4.4% in the first quarter of this year. It lowered the forecast for average price growth this year to 4.9% from 5.2% announced at the November meeting, and decreased the 2019 estimate to 5.4% from 5.5%, Sarb governor Lesetja Kganyago said.

The effect of a rating cut on the rand bond yields “could be significant, but the extent to which a universal downgrade is already priced in remains unclear,” Kganyago said. The government’s challenge is to “find ways to finance the deficit in a growth-positive manner, and at the same time convey a credible commitment to structural reforms.”

Mark Bohlund of Bloomberg Economics says: “The 2018 budget and associated responses from rating agencies could push down on the rand and lift import costs when it is announced in February. Today’s decision to keep rates on hold, rather than cutting, will provide some resistance to that pressure and moderate the impact on consumer prices.

“Despite gyrations in oil costs, the Sarb still sees inflation settling in the higher end of the target interval. Bloomberg Economics sees the number of committee members voting for a cut rising from one to two or three in coming meetings, but for the majority to favour rates on hold.”

The rand has strengthened 3.6% since December 18. – Bloomberg