South Africa

South Africa Monetary Policy April 2018

South Africa: SARB holds rates unchanged in May as inflation rises

At its three-day meeting ending 24 May, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) kept the repurchase rate unchanged at 6.50%. The decision, which followed the first rate cut in nearly a year at its previous meeting in March, was widely expected by analysts.

Analysts saw little room for the MPC to cut rates further in May given the recent rise in inflation, which jumped to 4.5% in April—the midpoint of the SARB’s 3.0%–6.0% target—on higher fuel prices and a one-point VAT hike. Although inflation is expected to remain within target over the forecast horizon, recent pressure on the rand from rising U.S. bond yields has fueled speculation that inflation could keep climbing in the short term. In the real sector, full-year growth is still expected to meet the SARB’s early-year forecasts despite a likely contraction in the first quarter. Ahead of first-quarter national accounts data on 5 June, the MPC hedged against an uncertain—but likely discouraging—outcome; the economy is expected to have contracted sharply in the quarter on the back of disappointing outturns by the manufacturing and mining sectors.

The MPC made clear it believes inflation has bottomed out and rand weakness is likely to persist, leaving further rate cuts all but off the table. That said, upside risks to inflation remain moderate—although oil prices are a concern—and the tepid economic recovery could keep rates from rising abruptly in the short term. Despite expected volatility, the SARB maintained its inflation and growth forecasts roughly as-is for the next two years and even hinted at optimism from recent survey-based data. As it stands, most FocusEconomics analysts see the repurchase rate remaining at 6.50% over the coming quarters as the recovery firms.

The MPC’s next meeting will be held on 17–19 July.

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