The logo of the South African Reserve Bank (SARB) sits on a document during a news conference following a Monetary Policy Committee meeting in Pretoria, South Africa. (Photographer: Waldo Swiegers/Bloomberg)

South Africa Central Bank Holds Rate as Fewer Increases Forecast

(Bloomberg) -- The South African Reserve Bank kept its key interest rate unchanged and trimmed its projection for policy tightening at its first meeting of the year.

The central bank’s six-member Monetary Policy Committee decided unanimously to hold the benchmark repurchase rate at 6.75 percent, Governor Lesetja Kganyago told reporters Thursday in the capital, Pretoria. The Reserve Bank’s quarterly projection model now prices only one 25 basis-point rate increase by the end of 2021, compared with three such moves by the end of 2020 it forecast in November.

Plunging crude prices coupled with recent gains in the rand have improved the bank’s inflation outlook. Still, the risks to the inflation remain “moderately to the upside,” Kganyago said. These include administered prices such as electricity and water tariffs, rising food prices and deteriorating investor sentiment toward emerging markets.

South Africa Central Bank Holds Rate as Fewer Increases Forecast

The bank prefers to anchor price growth close to the 4.5 percent mid-point of its target range. It increased rates for the first time in more than two years in November even as inflation didn’t breach the upper end of the range. At the time, it said delaying the adjustment could entrench inflation expectations at higher levels, which would require a stronger monetary-policy response in future.

“Overall, they kept a slightly hawkish tone so no more hikes, but cuts are very unlikely,” said Gina Schoeman, an economist at Citibank South Africa. The Reserve Bank “would probably only be willing to cut rates if inflation is far lower than any level where they have cut rates before.”

What Our Economist Says ... 

The sharp cut in the 2019 inflation forecast is likely to moderate expectations that the Reserve Bank will lift the policy rate this year. The 4.8 percent initial assumption for both core and headline inflation can be taken as an indication that the Reserve Bank  believes that lower inflation expectations will help to reduce price growth over time.

-Mark Bohlund, Bloomberg Economics

The MPC said gross domestic product probably expanded 0.7 percent last year. Africa’s most-industrialized economy hasn’t expanded by more than 2 percent a year since 2013 and according to the central bank’s forecast growth could reach 2.2 percent in 2021. Economic challenges are primarily structural, Kganyago said.

Thursday’s meeting marks Deputy Governor Francois Groepe’s last as a member of the MPC. His resignation takes effect on Jan. 31, and the process of choosing a successor is still under way. His successor will be the first senior executive at the central bank to be appointed by President Cyril Ramaphosa.

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