Bank’s stance on repo rate is wait and see

The Reserve Bank’s monetary policy committee is not committing to a rate-cutting cycle despite a lower inflation outlook and higher growth expectations.

While the inflation and growth forecast have improved markedly, the Bank emphasised that they still had not reached optimal levels. It expected inflation to remain within the target band of 3% to 6% in the medium term, averaging 4.9% in 2018 and 5.2% in 2019, while GDP was expected to pick up further after a surprise recovery in 2017 to 1.7% in 2018 and 1.5% in 2019.

“With the positive developments in SA, a basis has been laid for an economic recovery. We could be underestimating what the growth rate could actually be,” said Bank governor Lesetja Kganyago.

This was a result of improved political conditions and a resurgence of business and consumer confidence, Kganyago said. “Growth is expected to accelerate and could climb faster given successful implementation of structural reforms.”

According to the Monetary Policy Review released on Tuesday, the monetary policy committee has had to take a cautious approach in the past six months and in an uncertain environment repo rate decisions have been made on a meeting-tomeeting basis.

In the past year, it has had to contend with credit ratings downgrades, exchange rate depreciation, a “dramatic” political transition and then the steady appreciation of the rand.

The Bank said that by March, when it cut the repo rate by 25 basis points, major uncertainties around the political outlook, the budget and the prospect of further credit rating downgrades had dissipated.

Its quarterly projection model, however, pointed to the possibility of an interest rate hike cycle, with an increase of 25 basis points expected in 2019. It projected a repo rate of 7.5% by the end of 2020.

“The shocks that pushed inflation under 4.5% are fading, and higher taxes, especially value-added tax , will raise inflation again in the near term,” the review stated.