The South African Reserve Bank cut its benchmark repo rate by 25 bps to 6.5 percent on July 18th 2019, as widely expected. It was the first rate cut since March last year. Policymakers noted that inflation expectations continued to moderate and said that they will continue to focus on anchoring it near the mid-point of the inflation target range. The Committee added that future policy decisions are highly data-dependent, sensitive to the assessment of the balance of risks to the outlook.
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Excerpts from the statement by Governor Lesetja Kganyago:
The inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) is for headline inflation to average 4.4% in 2019 (down from 4.5%). The projections for 2020 and 2021 remain unchanged at 5.1% and 4.6%, respectively. Headline CPI inflation is expected to peak at 5.4% in the first quarter of 2020 and settle at 4.5% in the last two quarters of 2021. The forecast for core inflation is lower at 4.4% in 2019 (down from 4.5%), 4.7% in 2020 (down from 4.8%) and is unchanged at 4.5% in 2021.
Since the May MPC, the rand has appreciated by 3.3% against the US dollar, by 2.4% against the euro, and by 2.3% on a trade-weighted basis. The implied starting point for the rand is R14.30 against the US dollar, compared with R14.40 at the time of the previous meeting. At these levels, the QPM assesses the rand to remain slightly undervalued. While the rand has benefited from improved sentiment towards riskier assets, it underperformed its emerging market peers due to idiosyncratic factors.
Domestic growth prospects and fiscal risks rate high among investor concerns. GDP contracted by 3.2% in the first quarter, reflecting weakness in most sectors of the economy. The sharp quarterly decline was primarily caused by electricity shortages and strikes that fed into broader weakness in investment, household consumption and employment growth. Based on recent short term indicators for the mining and manufacturing sectors, a rebound in GDP is expected in the second quarter of 2019. Continued low business confidence remains a concern for the MPC. The Absa Purchasing Managers’ Index averaged 46.3 points in the second quarter, remaining below the neutral level. The RMB/BER Business Confidence Index remains unchanged at 28 points. The SARB’s composite leading business cycle indicator continued to trend lower.
The SARB now expects GDP growth for 2019 to average 0.6% (down from 1.0% in May). The forecast for 2020 and 2021 is unchanged at 1.8% and 2.0% respectively. The MPC assesses the risks to the growth forecast to be balanced in the near term but remains concerned about longer-term risks. Investment prospects will continue to be limited in the absence of structural reforms. The escalation of trade tensions could have further negative impacts. While some cyclical factors constrained recent GDP growth outcomes, the Committee remains of the view that current challenges facing the economy are primarily structural in nature and cannot be resolved by monetary policy alone. Implementation of prudent macroeconomic policies together with structural reforms that raise potential growth and lower the cost structure of the economy remains urgent.
The overall risks to the inflation outlook are assessed to be largely balanced. Demand-side pressures are subdued, wages and rental prices are expected to increase at moderate rates and global inflation should remain low. In the absence of shocks, relative exchange rate stability is expected to continue.
Against this backdrop, the MPC unanimously decided to reduce the repurchase rate by 25 basis points to 6.5% per annum with effect from 19 July 2019. Monetary policy actions will continue to focus on anchoring inflation expectations near the mid-point of the inflation target range in the interest of balanced and sustainable growth. In this persistently uncertain environment, future policy decisions will continue to be highly data-dependent, sensitive to the assessment of the balance of risks to the outlook, and will seek to look-through temporary price shocks.