SARB keeps key rate on hold at 7 pct, expects inflation to reach target corridor by 2017-end

As expected, the South African Reserve Bank kept its key rate unchanged during its meeting yesterday. The committee unanimously decided to leave the interest rate at 7 percent. But the central bank did raise its projection for inflation and expects the overall rate to come back to the target corridor of 3 percent to 6 percent by the end of 2017. It earlier projected inflation to reach the target corridor by the second quarter of 2017.

Apart from the increased oil price, this is mostly because of the strong rise in food prices as a result of the drought that is taking longer period to come to normal than anticipated. The central bank is now anticipating an average of 6.2 percent for 2017, as compared with the earlier projection of 5.8 percent. It still expects an inflation of 5.5 percent for 2018.

The SARB cut the growth projection for this year just slightly to the downside to a moderate growth of 1.1 percent as compared with the earlier forecast of 1.2 percent. It projects economy to expand 1.6 percent for 2018. The central bank appeared concerned regarding the deteriorating outlook of short term inflation and about the fact that inflation will stay too close to the upper end of its target range even in the longer term. But the central bank stressed again its readiness to hike interest rates further if second round effects come up.

After the meeting, the USD/ZAR pair eased further. At this point, the South African rand continues to be susceptible, noted Commerzbank in a research report. The nation still faces risk of being downgraded to junk status if the rating agencies consider the progress made with the reform attempts and steadying of the budget to be insufficient, added Commerzbank.