Reserve Bank keeps repo on hold, revises growth up to 4.2%

• The Reserve Bank's Monetary Policy Committee has unanimously decided to keep the repo rate unchanged at 3.5%.
• The decision is in line with economists' expectations, and the bank sees inflation expectations remaining stable.
• The bank revised the growth outlook to 4.2%.

The Reserve Bank's Monetary Committee (MPC) has unanimously decided to keep the repo rate unchanged at 3.5%, in line with economists' expectations.

The prime rate remains at 7%.

Governor Lesetja Kganyago made the announcement on Thursday, following the MPC's meeting this week.

Headline inflation was revised from 4.3% to 4.2% this year, and is unchanged at 4.4% for 2022 and 4.5% for 2023.

The forecast for core inflation for 2021 is lower at 3.0%, from 3.3%, previously.

It is unchanged at 4% for 2022 and 4.3% for 2023.

"Expectations of future inflation have broadly stabilised at around 4.0% for 2021 and 4.2% for 2022," said Kganyago. 

"With inflation expectations remaining stable, and despite inflation risk increasing, the Committee still expects inflation to be contained in 2021, before rising to around the midpoint of the inflation target range in 2022 and 2023."

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Notably, the bank revised the growth outlook from 3.8% to 4.2%, this on the back of better sectoral growth performances and a more robust terms of trade in the first quarter of this year, said Kganyago.

"Despite rising oil prices and a higher total import bill, commodity prices have risen to new highs, strengthening income gains to the economy.

"Household spending is expected to be healthy this year, in line with the easing of lockdown restrictions and low interest rates," he added.

Kganyago said that the reopening of the economy and resumption of activity is a key driver of growth this year, coming off a low base or a contraction of 7% last year. The same pattern is seen globally.

"South Africa is a small open economy, which trades with rest of world. It is important to embrace globalisation and take advantage of resurgence of growth globally."

While a positive terms of trade due to higher commodity prices have also contributed to the revision in growth, he said it is too soon to tell whether we are in a commodity super cycle.

It will take some time, however, to get growth back to pre-pandemic levels, said Kganyago. GDP is expected to grow by 2.3% in 2022 and by 2.4% in 2023. 

Bureau for Economic Research chief economist Hugo Pienaar told Fin24, ahead of the announcement, that incoming data for the first quarter shows that the growth outlook may be better than expected.

The rand remained at around R14.06 to the dollar after the announcement.