Governor of the South African Reserve Bank (SARB), Lesetja Kganyago, started off the Monetary Policy Committee (MPC) meeting presentation with stating that the downward trend in inflation, which was mainly attributable to the impact of lower oil prices, has reversed.
Therefore, the repurchase rate will remain the same at 5.75%. Four of the six members of the committee favoured an unchanged stance while two favoured a 25 basis point increase.
Though, the interest rate is most likely to be pushed up at the next meeting in July.
Kganyago went on to say that the deteriorating inflation outlook suggests that this unchanged stance cannot be maintained indefinitely.
“The MPC will continue to closely monitor the evolution of inflation expectations and other factors that could undermine the longer term inflation outlook and stands ready to act when appropriate,” said Kganyago.
First National Bank (FNB) agreed with that, stating that the rate hike is very likely.
“Interest rates have remained unchanged since July 2014, but we believe that a rate hike is becoming increasingly likely; its implementation only being held back by serious concerns about the economy and high unemployment,” said FNB CEO Jacques Celliers.
Though, Celliers believes that even a small rate hike is going to hurt consumers.
“Consumers are already absorbing much higher fuel and electricity prices with a strong likelihood of further increases in energy prices. Salary increases are also likely to be modest due to slower growth. For these reasons I urge consumers to reduce their borrowing and think carefully before taking a new loan,” said Celliers.
The problems with Eskom
The headline inflation forecast assumes electricity price increases of 13% from July 2015 and July 2016. This would be in line with the original multi-year price determination process of the National Energy Regulator of South Africa (Nersa).
However, the application by Eskom for a further 12,6% increase from 1 July 2015 will be decided at the end of June.
Due to the uncertainty regarding the application, Kganyago highlighted that it was not incorporated into the forecast.
However, it poses a significant upside risk.
“The direct and indirect effects of such an increase could increase average inflation by around 0,5 percentage points over a year,” said Kganyago.
Domestic growth is weak
Due to the continued problems with electricity supply, as well as low and declining levels of business, and consumer confidence, the domestic growth outlook remains weak.
Therefore, the SARB lowered the Gross Domestic Product (GDP) growth down from 2.2% to 2.1%, but then to increase to 2.7% in 2017.
“This forecast makes an assumption regarding the persistence of electricity shortages, which are expected to be relieved somewhat only in 2017,” said Kganyago.
Adding to this, household expenditure is expected to remain subdued, said Kganyago.
“At the same time, weak employment growth, high debt levels and continued household deleveraging, as well as expectations of higher interest rates may have impacted on the demand for credit,” said Kganyago.
For a full transcript of the speech, click here.