South Africa: South African Reserve Bank hikes the repo rate in January to fight high inflation
January 28, 2016
The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) decided to increase the repurchase rate by 50 basis points from 6.25% to 6.75% at its 28 January meeting. This was the third time in a year that the Bank hiked the repo rate and the decision took the markets by surprise. The Bank made this decision considering the inflation outlook as well as the current state of the economy.
The Central Bank commented that the domestic economy remains weak. The Bank revised its GDP forecasts and it now expects the economy to expand 0.6% this year before accelerating and increasing 1.6% in 2017. The SARB added that latest high-frequency data show that the mining sector remains under pressure due to a decline in commodity prices and subdued demand. On the external front, the Bank acknowledged that the outlook for emerging markets remains uncertain. International oil prices have dropped further since the MPC’s last meeting and the global oversupply is expected to continue in the short run, especially following the lifting of Iran’s sanctions.
Regarding price developments, the Bank commented that the inflation outlook had deteriorated since its last meeting in November. This is due to the weak currency and the effect of the worsening droughts on agricultural prices. These upward pressures are more than offsetting the impact of low oil prices. Peter Attard Montalto, Senior emerging markets economist and strategist at Nomura, comments:
“We expect inflation to rise significantly in 2016 as margin compression runs out of road, and retail sector wages and input costs like electricity rise, all added to higher food prices from the drought (and oil base effects catching up). This should keep the SARB in a steady hiking cycle through neutral rates of 7.50% into tight territory of 8.50% by the end of Q1 2017, albeit the latest MPC votes suggest the SARB may hike as slowly as possible from here. Nonetheless, the 50bp hike in January has confirmed our view that fear of inflation should outweigh low growth for the SARB.”
As a result of high inflation and a weak rand, the Bank’s inflation forecasts were updated in January. The SARB now expects inflation to average 6.8% in 2016 and 7.0% in 2017 and added that, “while oil prices have a moderating impact on the inflation outlook in the near term, base effects and the assumed upward trajectory contribute to the adverse inflation outlook in 2017. The forecast also incorporates changes in administered prices, in particular for water, while an upside risk remains regarding electricity tariff increases.” The Bank also noted that a peak of 7.8% is expected in the final quarter of this year or the first quarter of next year.
Author: Dirina Mançellari, Senior Economist