THE Reserve Bank left interest rates unchanged, as was widely expected, when it met on Thursday.
“We pressed the pause button on the hiking cycle,” Bank governor Lesetje Kganyago said.
In answer to questions about whether this was the end of the hiking cycle, and the committee might start considering rate cuts, he said: “The thing about the interest rate path is you have got to have certainty, you can’t just chop and change as you go along.”
Deputy governor Kuben Naidoo said that although the inflation trajectory was looking better out to the third quarter of 2017 , monetary policy was really only effective beyond 12 months’ time, and “we still think in the period beyond 2017 there are significant risks to inflation”.
Although inflation is running higher than the Bank’s 3%-6% target — the consumer price index (CPI) rose 6.3% in June, Wednesday’s report showed — it has stabilised there, while the outlook for economic growth has weakened.
The Bank now expects CPI inflation to average 6.6% in 2016, governor Lesetja Kganyago said on Thursday, from an earlier forecast of 6.7%, while the 2017 forecast was revised to 6% from 6.2% and 2018 to 5.5% from 5.2%. The Bank now sees inflation peaking at 7.1% in the fourth quarter of this year. Food inflation is expected to peak at 12%, also in the fourth quarter.
The economy contracted 1.2% in the first quarter, and the International Monetary Fund’s latest projections for the year put growth at just 0.1%.
The Bank on Thursday revised its projection for growth this year to 0% from 0.6%. Looking further ahead, it puts 2017 growth at 1.1%, from a previous 1.3% forecast, and the 2018 outlook is for growth of 1.5% from 1.7% before.
The sluggishness of the economy is one of the main concerns of international rating agencies, which will review their ratings of SA again at the end of the year, after issuing a reprieve from a drop to junk status in June.
All 16 of the economists surveyed by Business Day had expected rates to be left unchanged on Thursday. A stronger rand — it has strengthened to well below R15/$ — and prospects for stabilising or falling global interest rates had also supported their expectations.
Thursday’s decision left the repo rate unchanged at 7%. The Bank has raised rates by 75 basis points since the start of the year, and by 200 basis points since January 2014. The last rate increase was 25 basis points in March 2016, and followed a 50-point hike in January. In its annual report, released in June, the Bank warned that further increases this year probably cannot be avoided.
“As most measures of underlying inflation and inflation expectations are already close to the top end of the inflation target range, there is little space to defer a policy response,” the Bank’s management said in that report.
Two MPC members, deputy governors Francois Groepe and Daniel Mminele, have also separately raised concern over high inflation expectations.
Most economists expect one more interest rate hike of 25 basis points in 2016, either in September or November, the last two committee meetings of 2016.
Nomura’s senior emerging markets strategist, Peter Attard Montalto — who had put the odds of a rate hike on Thursday at 40%, depending on the outcome of the Bureau for Economic Research (BER) inflation expectations survey — said that even if inflation expectations appeared stable or anchored at just more than 6% for now, “risks are high that expectations can easily become unanchored in a wage-round year with food price issues”.
On the inflation outlook, Efficient Group economist Francois Stofberg said food prices would probably “return to trend rates early next year”, while a low oil price would ensure stable fuel prices.
First National Bank said on Monday that better rains were expected this summer, which would eventually bring relief on food prices.