The Monetary Policy Committee (MPC) on Wednesday reduced the repo rate by 25 basis points to 6.5% in line with market expectation.

Briefing reporters, Reserve Bank Governor Lesetja Kganyago said four members of the committee preferred a reduction, while three wanted an unchanged stance. The Central Bank last reduced the repo rate at its July 2017 meeting.

At its second meeting of 2018, the MPC considered the impact of the incoming 1% increase in South Africa’s Value Added Tax (VAT) that will come into effect on Sunday. The VAT increase was announced in the National Assembly in February.

Kganyago said the central bank focused on the second-round effects of the increase which are expected to remain small.

However, the MPC said while the domestic economic growth outlook for 2018 is more favourable, it remains challenging.

This follows an upward revision of historical gross domestic product (GDP) data and a fourth-quarter outcome of 3.1% which surprised on the upside. Following an annual growth rate of 1.3% in 2017, the SARB expects a growth rate of 1.7% for 2018 compared with 1.4% previously.

For 2019 the forecast is at 1.5% which is marginally lower than a previous forecast of 1.6%. Growth for 2020 is forecast at 2%.

At these growth rates, the negative output gap, which measured -1.1% in 2017, is expected to close in 2020. The composite leading business cycle indicator continued its upward trend in January, consistent with the improved outlook, said the Governor.

It said the improved growth outlook is driven primarily by an increase in business and consumer confidence.

Nedbank economists earlier in the week announced their expectation of a 25 basis point reduction said this would likely be as a result of much better-than-expected inflation figures and rating agency Moody’s decision not to further downgrade South Africa.

Chances of further cuts for the rest of the year will be limited by increasing inflation as the year progresses and improving domestic demand, said Nedbank.

Governor Kganyago said the affirmation of South Africa’s sovereign rating as ‘investment grade’ and the change of the outlook from negative to stable by Moody’s has contributed to the recent rand resilience.

Source: South African Government News Agency