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MPC interest rate decision

Interest rate - [http://businesstech.co.za/news/wp-content/uploads/2016/03/Interest-rate.png] Interest rate - [http://businesstech.co.za/news/wp-content/uploads/2016/03/Interest-rate.png]

Jacques du Toit, Property Analyst at Absa Home Loans

 
Interest rates unchanged: 
 
Based on a number of economic and interest rate-related factors, the Reserve Bank’s Monetary Policy Committee (MPC) decided to leave the key monetary policy interest rate – the repo rate – unchanged at a level of 7% per annum at its penultimate meeting of 2016. This caused commercial banks’ prime lending base rates for extending credit to the consumer and business sectors to remain stable at 10,5% per annum. Factors that prompted the MPC in keeping the repo rate unchanged include a strengthening rand exchange rate in recent weeks, less upward pressure on inflation, a subdued economic performance in the first half of the year, continued financial pressure on households and businesses and indications of a continued relatively subdued cycle of monetary policy tightening in the US. Recent high-frequency domestic data releases (mining production, manufacturing production, retail sales, new vehicle sales and the leading business cycle indicator) point to continued poor economic growth prospects in the near term. However, macroeconomic trends and inflationary pressures will be closely monitored and further rate hikes in coming months cannot be ruled out.
 
Interest rates hiked: 
 
In view of less upward pressure on inflation in the wake of a stronger rand exchange rate in recent weeks and indications of continued weak local economic growth prospects in the near term, the Reserve Bank’s Monetary Policy Committee’s (MPC) decision to further hike the repo rate came as a surprise to the market. Banks’ lending rates to consumers and the business sector were also hiked in response. The decision by the MPC to increase the repo rate came against the background of expectations of continued inflationary pressures, rand exchange rate volatility and the prospect of further gradual monetary policy tightening in the US, which will impact emerging market currencies, inflation, interest rates and economic growth. The higher interest rates will increase the pressure on highly-indebted households and corporates and dampen the demand for credit and goods and services over a wide front. Macroeconomic trends and inflationary pressures will be closely monitored and further rate hikes in coming months cannot be ruled out.
 

Johan Gouws Head of Absa Asset Consultants

 
Interest rate left unchanged
 
Having already raised interest rates by 0,75% during 2016 the Monetary Policy Committee of the South African Reserve Bank (SARB) had some room to maneuver in making their decision to keep interest rates unchanged today. Inflation remains a concern, but were not a large enough threat in terms of price stability when considering the weak local economic outlook for 2016. Given the focus on a possible credit rating downgrade any risk to further dampening economic growth prospects had to be avoided at all costs and raising interest rates would have resulted in increased concerns about local growth prospects. A delay by the Federal Reserve in the United States (US) to raise interest rates also provided for less pressure on the SARB to raise rates in order to avoid a potential outflow of foreign investments. A rate hike in the US would have put the rand under additional pressure considering the current political uncertainty. The decision to keep rates unchanged was therefore a case of the SARB following a pragmatic approach with regards to monetary policy as they considered the broader context within which their mandate of price stability is adhered to.
 
Interest rate increased
 
Having already raised interest rates by 0,75% during 2016 the Monetary Policy Committee of the South African Reserve Bank (SARB) had some room to maneuver in making their interest rate decision today. A delay by the Federal Reserve in the United States (US) to raise interest rates also provided for less pressure on the SARB to raise rates in order to avoid a potential outflow of foreign investments. The surprise decision to hike rates were taken within the context of a possible credit rating downgrade and any risk to further dampening economic growth prospects need to be avoided at all cost. Raising interest rates have increased concerns about local economic growth prospects for the remainder of 2016. However, inflation remains a concern due to higher food prices and a relatively weak rand. The decision to increase rates reflected the SARB’s key mandate, which is to ensure price stability in order to protect the interests of the poor.
 
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