Relief as Sarb cuts repo rate
INFLATION: OUTLOOK HAS IMPROVED, SAYS GOVERNOR
‘We won’t hesitate to reverse this decision if the situation deteriorates.’
The South African Reserve Bank (Sarb) announced yesterday that the monetary policy committee (MPC) decided to reduce the repurchase rate by 25 basis points to 6.75% per annum due to the improved inflation outlook and the deteriorated growth outlook.
This will come as a relief for consumers after the bank left its benchmark repo rate unchanged at 7% per annum in May, for the seventh time in a row since May 2016.
The prime lending rate, the figure charged by banks to customers, will now decline to 10.25%.
Reserve Bank governor Lesetja Kganyago announced that four members of the MPC preferred a reduction, while two members preferred an unchanged stance.
Kganyago said the underlying demand in the economy was extremely weak and the MPC is concerned about the deterioration in the growth outlook over the forecast period.
Despite this, Kganyago said the inflation outlook had improved significantly since the previous meeting of the MPC and had been fairly broad-based.
“As we have emphasised on numerous occasions, the MPC does not view monetary policy as the solution to the structural growth constraints in the economy. Nor does it believe that a reduction in interest rates will provide a significant stimulus to growth in the current environment of low confidence and political uncertainty. It will, however, provide some relief at the margin,” Kganyago said.
“We remain vigilant and would not hesitate to reverse this decision should the inflation outlook and risks deteriorate.”
Kganyago said a number of risks to the inflation outlook persisted and the MPC assessed the risks to the inflation outlook to be broadly balanced.
Although the rand has been relatively resilient, Kganyago said it remained vulnerable to heightened political uncertainty, global monetary policy developments and possible further credit ratings downgrades.
Kganyago said a further upside risk related to the possible supply side shock of a large electricity tariff increase from July next year.
Eskom has approached the National Energy Regulator of SA (Nersa) for an increase of around 20%, but the current forecast assumes an increase of 8%. This assumption will be adjusted in line with any new determinations made by Nersa.
But on the positive side, Kganyago said inflation outlook was supported by a sustained narrowing of the current account deficit and positive investor sentiment towards emerging markets. – ANA