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South African central bank keeps repo rate at 3.5pc

  • Policy makers in Brazil, Russia and Turkey delivering cumulative rate increases 300 basis points last week.
Updated 26 Mar 2021

JOHANNESBURG: South Africa's central bank bucked the trend of emerging markets raising interest rates by keeping its policy level unchanged on Thursday and betting on a long period of low inflation.

The South African Reserve Bank (SARB) left its repo rate at 3.5pc in a unanimous decision, saying overall risks to the inflation outlook appeared to be balanced and that pass-through from currency volatility was low.

"Governor (Lesetja) Kganyago didn't even mention turbulence in global bond markets in his statement, only in response to follow-up questions from the press, said Virág Fórizs of Capital Economics. "But it could've been the reason why a previously persistent dovish minority disappeared."

Emerging-market central banks have come under pressure in recent weeks from global rising yields, weakening currencies and rising inflation strains.

Policy makers in Brazil, Russia and Turkey delivering cumulative rate increases 300 basis points last week.

The SARB, however, resisted matching those increases, and has now kept rates on hold at four consecutive meetings.

Governor Kganyago said the pace of a local economic recovery would depend on offering COVID-19 vaccines and the appearance of a likely third wave of infections.

He said lower inflation, seen slowly approaching the mid-point its 3pc to 6pc range, supported accommodative rates.

Kganyago said growth of 3.8pc in 2021 was expected, up from January's 3.6pc.

Inflation is expected to average 4.3pc.

"The overall risks to the inflation outlook appear to be balanced. A more appreciated nominal exchange rate in recent months, and generally low pass-through, is expected to continue to moderate some inflationary pressure," said Kganyago.

The rand weakened in response to the decision, sliding to a session low of 15.0875 against the dollar, its worst level in two weeks.

Subdued price-growth has been largely caused by weak economic activity, with Africa's most advanced economy shrinking by a record 7pc in 2020, and the SARB is keen to keep support for consumers in place.

"The messaging is even more important than the now-unanimous decision," said Razia Khan, Africa economist at Standard Charted.

"It would be a mistake to read unanimity on the MPC as a more hawkish stance. Little room for further easing does not mean imminent tightening."