Sarb trims repo rate as expected

GROWTH OUTLOOK FAVOURABLE

South Africa’s Reserve Bank (Sarb) trimmed its benchmark repo rate to 6.5% yesterday, in another boost for the economy after ratings agency Moody’s left SA’s last investment-grade credit rating intact.

The 25-basis point cut was expected by traders and economists.

Central bank governor Lesetja Kganyago said risks to SA’s inflation outlook had subsided since the bank’s last monetary policy meeting in January and the outlook for economic growth was more positive but still challenging.

Kganyago said four members of the monetary policy committee had preferred to cut the rate and that three members wanted to hold the rate yesterday. He said there was no discussion of a more aggressive 50-basis point rate cut.

“In this uncertain environment, future policy decisions will be highly data-dependent and sensitive to the assessment of the balance of risks to the outlook.”

The central bank’s first monetary easing step since July comes as investors have piled into rand assets on hopes that new President Cyril Ramaphosa will follow through on promises to reform the economy and root out corruption.

Since the previous meeting of the Monetary Policy Committee (MPC), the risks to the inflation outlook have subsided somewhat.

The affirmation of SA’s sovereign rating as ‘investment grade’ and the change of the outlook from negative to stable by Moody’s Investors Service has contributed to the recent rand resilience.

The inflation forecast of Sarb has shown a moderate improvement despite the adverse impact of the VAT increase due to be implemented in April.

This increase, combined with base effects and other indirect tax increases, implies that the low point of the inflation cycle was reached in the first quarter of 2018, at a forecast average of 4.1%.

Headline inflation is expected to average 4.9% in 2018 (unchanged), 5.2% in 2019 (down from 5.4%), and 5.1% in 2020. A peak of 5.5% is expected by the first quarter of 2019.

The domestic economic growth outlook for this year is more favourable but remains challenging. Following an annual growth rate of 1.3% in 2017, Sarb expects a growth rate of 1.7% for 2018 compared with 1.4% previously. The forecast for 2019 is 1.5%, marginally lower than the previous forecast of 1.6%, while a growth rate of 2% is forecast for 2020.

The rand has sustained its recent gains since late last year, and some of the key risks to the outlook have dissipated. Since the previous meeting of the MPC, the rand has appreciated by 4.8% against the US dollar.

At current levels, the Sarb’s model assesses the rand to be somewhat overvalued, and further strengthening potential is probably limited. The rand has reacted positively to domestic political developments recently and was given further support following the recent sovereign credit rating announcement. More support comes from recent dollar weakness.