South Africa Monetary Policy

South Africa

South Africa: South African Reserve Bank hikes the repo rate by 25 basis points in November

November 19, 2015

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) decided to increase the repurchase rate by 25 basis points from 6.00% to 6.25% at its 19 November meeting. The decision to hike the repo rate for the second time this year surprised the markets, as the Bank was seen leaving the repurchase rate at 6.00%. The Bank made this decision considering the inflation outlook as well as the current state of the economy.

The Central Bank commented that economic growth was weak in the third quarter despite performance in the manufacturing sector having improved and that the mining and the agricultural sectors likely contracted in Q3 due to adverse weather conditions. Against this backdrop, employment in the formal sector was disappointing. In fact, the official unemployment rate increased to 25.5% in the third quarter from 24.3% in the second. On the external front, the Bank added that even though the financial markets have stabilized somewhat since the previous meeting, the outlook for emerging markets remains uncertain and further volatility is expected in the lead-up to the Fed decision regarding the U.S. policy rate in December.

The SARB acknowledged that the economic outlook remains fragile amid weak domestic and external demand and added that, “the key risks are a marked depreciation of the rand; worsening drought conditions and their likely impact on food prices; and the possibility of additional electricity tariff adjustments.” As a result, the MPC revised its growth forecast down marginally this month. For 2015, it expects GDP to grow 1.4% (previous estimate: +1.5%) before accelerating slightly to a 1.5% increase in 2016 (previous estimate: +1.6%). Although the change in the forecast was minimal, the Bank considers the risks to the domestic outlook to be on the downside, while in the previous meeting they were evaluated as relatively balanced.

Regarding currency developments, the rand has depreciated significantly since the MPC’s last meeting. The currency has been particularly vulnerable to falling commodity prices and expectations of the start of U.S. interest rate increases. However, the Bank added that there is uncertainty as to the extent to which the U.S. policy normalization is being priced into the exchange rate developments. Apart from the weak currency, other upside risks to inflation come from a possible electricity tariff and food price increases following the electricity and water shortages. In October, inflation increased from September’s 4.6% to 4.7%, thus reaching the highest level in three months. The Bank expects inflation to average 4.6% in 2015, compared to the previous forecast of 4.7%, but noted that inflation will likely breach its upper target of 6.0% for two consecutive quarters in 2016. In fact, the SARB commented that the upside risks to the inflation outlook are considered more pronounced compared to the previous meeting. The MPC also added that, “these risks relate to the persistent exchange rate depreciation, electricity tariffs and food prices, and are assessed to outweigh possible downside risks from lower international oil prices and subdued exchange rate pass-through.”

Within this setting, FocusEconomics Consensus Forecast panelists expect the repo rate to end this year at 5.92%. For next year, the panel expects the repo rate to end the year at 6.45%.

Author:, Senior Economist

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South Africa Monetary Policy Chart

SouthAfrica Monetary Policy November 2015

Note: Monetary Policy Rate in %.
Source: South African Reserve Bank (SARB).

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