The Reserve Bank’s Monetary Policy Committee (MPC) has raised the repo rate to 5,0% from 5,5% with effect from 30 January. This was against the market consensus. The expected impact of the weak rand, with the MPC indicating that further weakness is likely, was the main reason for the hike. The Governor noted that the unit’s continued weakness has “resulted in a marked increase in the upside risks to the inflation forecast”. The pass-through of rand depreciation to inflation has been muted so far, but a sustained depreciation could have an adverse impact on inflation. The Governor stressed that “exchange rate pressures are expected to intensify as markets adjust to the new pattern of global capital flows”. The Reserve Bank, like other emerging market central banks, is facing the policy dilemma of a depreciation currency, capital outflows, slowing growth, rising inflation, a large current account, a high fiscal deficit and rising global risk aversion. The Reserve Bank revised its inflation forecasts higher, with CPI now expected to breach the 3% to 6% target band during this year. Inflation, which averaged 5,7% in 2013, is projected to average 6,3% in 2014 (5,7% at the time of the November meeting) and 6,0% in 2015 (previously 5,4%). CPI is expected to breach the upper limit of the target band in the second quarter of 2014, peaking at 6,6% in the fourth quarter before averaging 6,0% and 5,9% in the second and final quarter of 2015, respectively. Core inflation, which averaged 5,2% in 2013, is projected to average 5,8% in 2014 (previously 5,6%) and 5,9% in 2015 (previously 5,3%).
Posted on: Wed, 29 Jan 2014 17:47:43 +0000
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