South Africa: South African Reserve Bank hikes the repo rate again in May
May 19, 2016
On 19 May, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) decided to keep the repurchase rate unchanged at 7.00%. This year, the Bank has twice increased its benchmark rate in order to fight high inflation.
The Central Bank commented that domestic economic growth continues to disappoint with a recovery in economic activity being unlikely in the short term. Recent high-frequency data point to a bleak picture of the economy in the first quarter. According to the Bank, the mining sector recorded a sharp contraction while the manufacturing sector barely grew. Moreover, the labor market disappointed and the unemployment rate jumped in Q1. This month, the Bank downgraded and now expects the economy to expand 0.6% this year, which is down from the 0.8% increase previously estimated. Moreover, the SARB slightly revised its growth projections for next year from 1.4% to 1.3%.
Regarding price developments, the Bank commented inflation eased slightly in April. However, going forward, inflationary pressures are expected to remain high amid an increase in food prices and a weak currency. The partial recovery of the rand in April proved to be short-lived and the currency depreciated sharply in May amid domestic headwinds. The Bank expects inflation to drop within the target range of 3.0%-6.0%in the third quarter of 2017. It also revised its projections for both this year and the next and now expects inflation to hit 6.7% on average this year before moderating slightly to 6.2% next year.
Author: Dirina Mançellari, Senior Economist