South Africa surprises market with interest rate cut

  • July 20, 2017
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South Africa’s central bank cut its interest rates for the first time in five years on Thursday in an effort to help stimulate the economy, which unexpectedly fell into recession at the start of the year.

The cut was the first time the South African Reserve Bank has changed rates in 16 months. Some figures in the ruling African National Congress have encouraged the bank to prioritise economic growth, but the SARB has previously been focused on bringing down the country’s high inflation rate, which hit 7 per cent last year.

However, a recent dip has reduced pressure on the bank, allowing it to cut its key interest rate from 7 per cent to 6.75 per cent. Year-on-year inflation finally fell into the central bank’s three to six per cent target corridor in April, and data released yesterday showed it dropped further than expected to 5.1 per cent in June.

Of the 23 economists surveyed by Bloomberg ahead of the meeting, only three had predicted any change to the repo rate.

The rand weakened after the decision was announced, and at publication time was down 0.8 per cent for the day against the dollar (though the fall was far from exceptional given the currency’s recent travails).

Lesetja Kganyago, SARB governor stressed that “risks to the inflation outlook still remain”, but the bank still reduced its inflation forecasts for the next three years.

At the same time, it halved its growth forecast for 2017 and cut its predictions for 2018 and 2019. The combination of improved inflation outlook and worsening growth outlook prompted four of the central bank’s six MPC members to back the rate cut.

Mr Kganyago said the hope will hopefully “provide some relief at the margin”, but stressed that monetary policy alone will not be enough to “provide a significant stimulus to growth in the current environment of low confidence and political uncertainty”.

He added that the bank “would not hesitate to reverse this decision should the inflation outlook and risks deteriorate”.

Photo and chart: Bloomberg

 

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