South Africa CB Leaves Key Rate Unchanged; Signals Future Hikes

(RTTNews) - South Africa's central bank left its key interest rate unchanged on Thursday, after raising it in late January, citing subdued economic outlook and rising inflation, and signaled that the rate is likely to be hiked in the medium term.

The Monetary Policy Committee of the South African Reserve Bank, led by Governor Gill Marcus, maintained the repurchase rate unchanged at 5.5 percent. The decision was in line with economists' expectations.

Responding to reporters' questions, Marcus said the latest decision to maintain status quo was not unanimous.

On January 29, the bank had lifted the rate by 50 basis points, which was the first raise in nearly six years. The hike came amid a sell-off in the financial markets over concerns regarding the withdrawal of stimulus by the Federal Reserve.

"The real policy rate is currently below what can be considered normal in the long run and is likely to increase over the medium term," Marcus said. "The pace of tightening will depend on a number of factors including projected inflation, inflation expectations, the state of the economy and global developments."

Policymakers are also concerned that too slow a pace of tightening could undermine inflation expectations and may require more aggressive tightening in the future, the central bank chief noted.

"Consistent with our mandate, a fine balance is required to ensure that inflation is contained while minimizing the cost to output," Marcus added. Inflation accelerated to 5.9 percent in February.

Marcus reiterated that the bank is in a tightening cycle. However, she pointed out that there will not necessarily be a change in the stance at every meeting, and that the hikes may not always be of the same magnitude.

Despite the recent appreciation of the rand, the upside risks to inflation persist, while the risks to growth remain on the downside, posing a dilemma for monetary policy, the bank said.

The central bank retained the 2014 inflation forecast at 6.3 percent, while it cut the outlook for next year to 5.8 percent from 6 percent, citing the lagged effect of the repo rate increase. Forecasts for core inflation this year and next were also lowered to 5.6 percent, from 5.8 percent and 5.9 percent, respectively.

The MPC still assesses the risks to the inflation outlook to be skewed to the upside, as extended periods of overshooting of the exchange rate remain a possibility in the current uncertain global environment, the bank said.

The growth forecast for 2014 was cut to 2.6 percent from 2.8 percent, while the projection for 2015 was lowered to 3.1 percent from 3.3 percent. The risks to this forecast are seen to be on the downside, given the protracted strike in the platinum sector and electricity supply constraints, the bank said.