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Central bank to keep repo rate unchanged and monitor inflation – economists

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Central bank to keep repo rate unchanged and monitor inflation – economists

Central bank to keep repo rate unchanged and monitor inflation – economists
Photo by Bloomberg

21st May 2019

By: African News Agency

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The South African Reserve Bank (SARB) is likely to keep the repurchase (repo) rate unchanged at 6.75 percent on Thursday while retaining a cautious policy stance given upside risks to the inflation outlook, economists have said.

In March, the SARB's monetary policy committee (MPC) unanimously decided to keep the repo rate at which it lends to commercial banks unchanged as it cut its economic growth forecast. The MPC however warned of inflationary pressure in the months ahead stemming from increases in electricity tariffs, fuel prices and the rand exchange rate.

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Investec economist Kamilla Kaplan said the effect of higher energy price inflation, reflecting the R1.31 per litre and 82 cents per litre increases in petrol and diesel prices respectively, would likely be partially countered by contained food price growth.

Kaplan said consumer inflation (CPI) was projected to have remained steady at 4.5 percent year-on-year in April. 

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"Although market and survey-based measures of inflation expectations have moderated towards the mid-point of the 3-6 percent target range, and underlying inflation is likely to remain benign, the SARB will remain on guard with respect to possible second round effects stemming from higher food, fuel and electricity price inflation," she said.

"Additionally, CPI inflation is set to rise back towards the upper end of the target range in 2020 on low base factors and high administered price increases, especially electricity. As such, the repo rate is likely to remain on hold at 6.75 percent to account for the upside risks to the inflation outlook and the higher projected inflation over the forecast horizon."

FNB chief economist Mamello Matikinca-Ngwenya also predicted a "no change" decision on the repo on Thursday, citing muted expectations for inflation and the fact that the SARB's leading indicator -- which aims to provide foresight into where the economy is heading -- has contracted for five consecutive months, the longest streak since early 2016. 

Matikinca-Ngwenya anticipate April inflation would edge up 0.1 percentage points to 4.6 percent year-on-year, with much of the upward pressure stemming from the petrol price increase. 

"We anticipate core inflation, excluding volatile food and non-alcoholic beverages, petrol and energy subcomponents, to register a relatively low 4.1 percent year-on-year in April as retailers struggle to pass on higher costs to the consumer amid a deterioration in household balance sheets," she said.

"We anticipate that the SARB will lower their inflation forecasts closer to our projections amid a widening output gap, keeping core inflationary pressures well contained. As such, we expect a more dovish tilt in the Governor's statement."

Reserve Bank Governor Lesetja Kganyago is set to announce the policy decision at a news conference on Thursday afternoon.

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