The South African central bank reduced its repurchase rate by 25 basis points to 6.5%, effective March 29, citing an improved inflation outlook despite the adverse impact of a value-added tax increase to be implemented in April.
The South African Reserve Bank, or SARB, said the stronger rand exchange rate mitigated the risk of temporary upside pressure on inflation due to the value-added tax, or VAT, rate increase to 15%. The bank added that Moody's investment grade affirmation and outlook revision to stable contributed to the recent rand resilience.
"This [VAT] increase, combined with base effects and other indirect tax increases, implies that the low point of the inflation cycle was reached in the first quarter of 2018, at a forecast average of 4.1%," the central bank said.
SARB expects headline inflation to average 4.9% in 2018, unchanged from the previous forecast; 5.2% in 2019, down from 5.4%; and 5.1% in 2020. A peak of 5.5% is expected by the first quarter of 2019 before the VAT increase falls out of the data.
The year-on-year inflation rate was 4.4% in January and 4.0% in February, within the target range. SARB's core inflation gauge, which excludes food, fuel and electricity, remained flat at 4.1% in February.
Core inflation is projected to be 4.6% in 2018 and 4.9% in 2019 and 2020.
Following an annual GDP growth rate of 1.3% in 2017, the central bank expects growth of 1.7% for 2018, compared with 1.4% previously. The forecast for 2019 is 1.5%, compared to the previous forecast of 1.6%, while a growth rate of 2.0% is projected for 2020.