Reserve Bank leaves rates unchanged

The Reserve Bank’s Monetary Policy Committee has left the repo rate unchanged at the conclusion of its three-day meeting

“The increase in the repo rate at the previous MPC meeting contributed to the improvement in the longer-term inflation forecast, and that move should be seen in conjunction with previous actions in the cycle and the lagged effects of monetary policy.

“The MPC felt that there is some room to pause in this tightening cycle and accordingly decided to keep the repurchase rate unchanged for now at 7,0 per cent per annum. Five members preferred no change, while one member preferred a 25 basis point increase,” said Lesetja Kganyago, Governor of the South African Reserve Bank.

Most private sector economists had expected the MPC to pause in its interest rate hiking cycle‚ and that view was bolstered by consumer inflation and retail sales data released on Wednesday. The Bank has raised rates by a cumulative 75 basis points since the start of the year to put the repo rate at 7%.

The consensus from a BDlive survey of 13 private sector economists was for rates to remain on hold. Only three of the 13 economists had forecast an increase of 25 basis points.

Twenty-two of 32 economists polled by Reuters expected the Bank to hold interest rates steady. The median prediction was that there was still a 45% chance of an increase.

“The combination of a more resilient rand‚ recent softer inflation prints and a still very fragile economy should be enough to keep the MPC on hold next week‚” BNP Paribas Securities economist Jeff Schultz said last week.

Although the rand has taken a knock this week — weakening to about R15.88/$ on Wednesday on a combination of political concerns‚ dollar strength and the likelihood of rates not rising‚ and quoted at R15.8043 at midday on Thursday — a relatively benign inflation print and worse than expected retail sales pointed to the likelihood of the Bank staying its hand.

The weak rand and rising food prices have been persistent concerns for the Bank‚ and it flagged them again on Thursday.

The consumer price index (CPI) rose 6.2% in April‚ as expected‚ Statistics SA data showed on Wednesday. Although outside the Bank’s 3%-6% target range‚ it continued the moderating trend of recent months‚ slowing from 6.3% in March and 7% in February.

Retail sales growth for March‚ meanwhile‚ came in at 2.8% year on year‚ slowing sharply from 4.1% in February and much lower than the 3.6% consensus forecast‚ underlining the pressure consumers are under as higher interest rates‚ the rising cost of living and growing unemployment bite.

The unemployment rate rose to 26.7% in the first quarter‚ from 24.5% in the last quarter of 2015. Economic growth in the final quarter of last year was 0.6% year on year‚ and growth slowed in every quarter of 2015.

Also supporting the view that the Bank would hold rates steady was the fact that the decision to raise policy rates by 25 basis points in March was already an extremely divided call: three MPC members voted to remain on hold and three voted for an increase of 25 basis points.

Investec economist Kamilla Kaplan had also hoped the Bank would stay put‚ noting that risk aversion towards emerging markets had subsided of late and that the trade-weighted rand had appreciated by about 1.8% since the last MPC meeting in March.

Nevertheless‚ Schultz noted that the increased volatility of the currency in recent weeks‚ continued concern that SA could still lose its investment-grade credit rating this year‚ and uncertainty about the pace of policy tightening by the US Fed Reserve would most likely cause the Bank to continue to view the weak rand as one of the largest upside risks to the inflation outlook.

He also thought the Bank was unlikely to go back on its March view that inflation would remain outside the inflation target until the third quarter of 2017‚ although consumer inflation has moderated slightly.