Economist says the decision by the Reserve Bank to keep rates unchanged will provide consumers with space to start 2019 on a positive note.
The move will see the prime rate used by banks as a benchmark when lending to customers maintained at 10.25%.
Reserve Bank Governor Lesetja Kganyago attributed the recent appreciation in the Rand coupled with lower oil prices for the current favourable inflation outlook. The Reserve Bank has kept the repo rate unchanged at 6.75% as expected.
Kganyago welcomed the recent improvement in the inflation outlook due to a stronger Rand and a drop in the petrol price.
The bank expects inflation to remain within the target range averaging 5.3% in the medium term. However, Kganyago has warned that risks to the inflation outlook remain.
“The overall risks are assessed to be moderately on upside. The risks include administered prices, rising domestic food prices, changing investor sentiments and volatile oil prices.”
Economist Lumkile Mondi says risks could prompt the Reserve Bank to increase rates in the future.
“We face risk due to the impact of the grain season. Many farmers didn’t plant due to drought and the rain coming late. Secondly, it’s the fact that negotiations around trade, whether is China or America or Brexit. Those remain risks as well as what will happen to SA in May, whether we will have a strong ANC to implement the changes that are required.”
Good news is that indebted consumers will continue paying the same for their debt. The Reserve Bank has also lowered the expected pace at which it could raise interest rates. It expects one hike of 25 basis points reaching 7% by the end of 2021. The outlook for inflation has also improved.
Consumer inflation is expected to average 4.8% in 2019 down from 5.5% previously.
“What it means is that the outlook of four interest rate hikes is not going to happen, given the inflation outlook for the next year and the following year.”
However, Rand volatility, tighter monetary policy in developed markets, administered prices as well as food prices remain the biggest upside risks to inflation.