The Monetary Policy Committee of the South African Reserve Bank (SARB) unanimously decided on November 20 to keep its key repo rate unchanged at 5.75%, in line with expectations, “given the lower trajectory of headline inflation and the continued weak state of the economy”, the new governor, Lesetja Kganyago, said at a televised press conference following a three-day policy meeting.

SARB has hiked the repurchase rate, at which it lends rands to private banks, by a total of 75bps this year to curb rising inflation and a depreciation of the local rand currency. The MPC members still believe that interest rates will have to be raised further over time, with the timing depending on the evolution of inflation expectations, the speed of monetary policy tightening in the US and the domestic economic conditions.

Kganyago noted that the recent drop in oil prices – from a peak of around $115 per barrel in June to current levels of below $80 per barrel – coupled with moderating food price pressures, both global and domestic, have contributed to an improved inflation outlook. However, he highlighted that the underlying inflation pressures, as reflected in the elevated level of core inflation, persist.

SARB revised down its average headline inflation forecast to 6.1% from 6.2% for 2014, to 5.3% from 5.7% for 2015, and to 5.5% from 5.8% for 2014. On the other hand, the bank’s forecast for core inflation remained largely unchanged at an average 5.6% and 5.7% in 2014 and 2015 respectively, reaching a peak of 5.9% in Q1 2015, and easing to 5.3% in 2016.

The MPC assesses the risk to the headline inflation forecast to be broadly balanced, with potential upside risks stemming mainly from a further depreciation of the rand, which is vulnerable to global sentiment shifts and to the slow pace of contraction in South Africa’s current account deficit. Another risk is presented by wage increases at rates above inflation and productivity growth in the coming year.

Regarding economic growth, Kganyago said that after two quarters dominated by prolonged industrial auctions, some recovery is expected, but demand remains subdued. The performance of the strike-hit mining and manufacturing sectors is expected to improve, but the outlook is inhibited by domestic structural constraints, as well as by a weak global economy and the continued declining trend in non-oil commodity prices.

SARB cut its 2014 GDP growth forecast further to 1.4% from 1.5% projected in September, 1.7% expected in July and 2.1% predicted in May. The forecasts for both 2015 and 2016 were also revised down, by 0.3pps to 2.5% and by 0.2pps to 2.9%, respectively.