South Africa: South African Reserve Bank hikes the repo rate by 25 basis points
July 23, 2015
The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) decided to increase the repurchase rate by 25 basis points from 5.75% to 6.00% at its 23 July meeting. The decision to hike the repo rate for the first time this year surprised the markets, as the Bank was seen leaving the repurchase rate at 5.75%. The Bank made this decision considering the inflation outlook as well as the current state of the economy.
The SARB acknowledged that economic growth remains subdued amid electricity supply constraints and low levels of consumer and business confidence. In Q1, the economy grew a weak 1.3% on a quarterly basis and more recent data suggest that second-quarter growth is likely to have been broadly similar, mainly on the back of a fragile manufacturing sector. According to the Bank, “although the PMI improved in May and June, it remains around the 50 index point level, consistent with a constrained outlook. The mining sector, by contrast, has displayed some resilience, […] although the weaker platinum and palladium prices are expected to create further headwinds.” Against this backdrop, the MPC revised down its growth forecast marginally this month. For 2015, it expects GDP to grow 2.0% (previously estimated: +2.1%) before accelerating slightly to a 2.1% increase in 2016 (previously estimated: + 2.2%).
Regarding currency developments, the rand has depreciated significantly since the MPC’s last meeting. The currency has been particularly vulnerable to the volatility in the Chinese equity markets, falling commodity prices and expectations of the start of U.S. interest rate increases. The Bank added that, “the rand remains a significant risk factor to the inflation outlook.” In June, inflation increased from May’s 4.6% to 4.7%, thus reaching the highest level in six months. The Bank’s inflation forecasts were revised up marginally since the previous meeting assuming an increase in electricity prices. For this year, the SARB expects inflation to average 5.0% before jumping to 6.1% in 2016.
Author: Dirina Mançellari, Senior Economist