Surprise interest rate cut

The South African Reserve Bank’s surprise decision to cut interest rates by 25 basis points offers some reprieve for financially strained South Africans.

Announcing the outcome of the Reserve Bank’s monetary policy committee (MPC) meeting, governor Lesetja Kganyago said the bank’s repo rate would be cut to 6.75%. The prime lending rate charged by banks will drop from 10.5% to 10.25%, probably because inflation has remained within the Reserve Bank’s target range of 3% to 6%.

Although offering consumers relief on interest payments, the cut is the product of stalled economic growth.

“Domestic growth prospects have deteriorated further following the surprise GDP [gross domestic product] contraction in the first quarter of 2017. The economy has now recorded two successive quarters of negative growth and, although a near-term improvement is expected, the outlook remains challenging,” Kganyago said. “A number of sentiment indicators and data points have reached levels last seen in the 2009 recession, at the height of the global financial crisis.”

Kganyago said underlying global inflation trends remained benign, with inflation below target in most advanced economies. “Despite the absence of inflationary pressures, central banks in a number of advanced economies have signalled intentions to move from highly accommodative monetary policy stances. These countries include the US, the UK, the euro area and Canada. This process ... could generate bouts of uncertainty,” he said.

The rand’s relative resilience had been underpinned by the generally positive sentiment towards emerging markets, as well as by sustained trade surpluses, Kganyago said.

“The current account deficit is still expected to widen over the forecast period, but the degree of widening has been revised down.”

But he warned that the rand remained vulnerable to increased global risk aversion, domestic political shocks and to the possibility of further ratings downgrades.