6.5% interest rate remains
EXPECTED: EXPERTS UNSURPRISED, THOUGH A CUT ‘WOULD’VE BEEN NICE’
Rand is expected to remain slightly undervalued.
The Reserve Bank’s monetary policy committee (MPC) has kept the main lending rate at 6.5%. The banks’ prime lending rate is thus 10%. This follows a 25-basis point cut in July.
The Reserve Bank (Sarb) repeated calls for structural reforms to raise the potential growth rate, saying weakness in many sectors of the economy remain a cause for concern.
Highlights from Sarb governor Lesetja Kganyago’s speech: Inflation
Fuel price inflation is expected to average 2.4% in 2019 and peak at 11.8% in quarter one (Q1) of 2020. While food price inflation is expected to peak at about 6% in Q3 of 2020.
Sarb’s quarterly projection model (QPM) sees headline inflation averaging 4.2% in 2019 (down from 4.4%); 5.1% in 2020 and 4.7% (from 4.6%) in 2021.
Growth
Global gross domestic product (GDP) is expected to slow to 3.2% in 2019 and rise to around 3.5% in 2020.
The forecast of GDP growth for 2019 remains unchanged at 0.6%. The forecasts for 2020 and 2021 have decreased to 1.5% (from 1.8%) and 1.8% (from 2.0%) respectively, due to revisions to global growth and domestic potential growth.
Rand
Since the July MPC, the rand has depreciated 4.6% against the US dollar and by 3% against the euro.
“The QPM assesses the rand to remain slightly undervalued. While the rand has benefitted from improvements in global sentiment, investors remain concerned about domestic growth prospects and fiscal risks.”
Reaction
Prior to the meeting, analysts generally predicted that rates would be kept steady. However, there was a mixed reaction to the decision.
The Steel and Engineering Industries Federation of Southern Africa economist Marique Kruger said the decision bodes well for struggling metals and engineering sector businesses, and provides certainty.
“The bank’s decision was expected, especially given the current state of the domestic economy, which is in dire need of any kind of boost to ignite business activity.”
Greeff Christie’s International Real Estate chief executive Mike Greeff said it signals Sarb “is satisfied with the current economic status of the country and is happy to adopt a ‘wait and see’ attitude with regard to balancing the growth of the economy versus keeping inflation under control”.
Seeff Property chair Samuel Seeff found the decision “disappointing”, calling for bold action to stimulate the economy and property market.
“Simply put, a bold rate cut fuels economic activity as it makes it cheaper for businesses and consumers to borrow.
“The SA economy is struggling, and sentiment and lack of political confidence in the market remains worryingly low. A cut in the interest rate would assist, especially since business confidence is at its lowest point in 20 years.”
Similarly, Pam Golding CEO Dr Andrew Golding said while the decision is positive for stability, it’s unlikely to stimulate increased activity in property.
“What is needed right now is a meaningful confidence boost to offset the global and local macroeconomic and socio-political factors impacting on the market and jump-start the muted economy, and create impetus in the property market.” – Moneyweb and Reuters