South Africa's Reserve Bank left its benchmark lending rate unchanged at 7 percent on Thursday, but kept options alive for further tightening later in the year as it faced a policy dilemma of rising inflation and low growth. The MPC has raised interest rates by 125 basis-points since July to control inflation even as the economic outlook worsened and the nation’s debt risks being downgraded to junk.
SARB governor Lesetja Kganyago said that growth is still low but there are signs of a turnaround. The bank lowered its inflation forecast for the next three years, and said the country's economic recovery would be slow. He noted that the rand is continuing to battle against the major currencies due to global growth concerns and the MPC won't hesitate to increase rates, but not for now.
Kganyago said that while headline consumer prices would average 6.7 percent in 2016, up from previous forecast of 6.6 percent, inflation in 2017 and 2018 would moderate.
“While the SARB kept rates unchanged yesterday, their statement was hawkish enough to keep the door wide open for further hikes. There is a risk that they act in July and we think it will take a meeting or two yet for the SARB to convincingly signal the end of the cycle. We remain of the view that rates will start being cut from next year.” said RMB Global Markets in a research note.
USD/ZAR initially traded higher before losing momentum and slowly moving lower post central bank decision to stay pat.
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