Low in­fla­tion forces in­ter­est rate cut

Bench­mark repo rate now at 6.75% in first cut since 2012

The Star Early Edition - - BUSINESS REPORT - Ka­belo Khumalo

THE IM­PROVED in­fla­tion out­look yes­ter­day shrugged off the tech­ni­cal re­ces­sion and sub­dued busi­ness and con­sumer con­fi­dence, as the SA Re­serve Bank Mone­tary Pol­icy Com­mit­tee (MPC) took the mar­kets by sur­prise when it low­ered its bench­mark repo rate by 25 ba­sis points (bps) to 6.75 per­cent, its first in­ter­est cut since 2012.

The rand re­acted sharply to the MPC de­ci­sion, re­vers­ing its gains this week af­ter it fell out­side the psy­cho­log­i­cal bar­rier of R13 to the dol­lar.

The rand was bid at R13.02 at 5pm yes­ter­day from a day’s high of R12.92, while it re­treated to R16.87 to the pound and weak­ened to R15.14 against the euro.

The Re­serve Bank also cut its growth fore­cast for this year to 0.5per­cent from 1 per­cent, and the fore­cast for 2018 to 1.2 per­cent from 1.5 per­cent it had fore­cast pre­vi­ously.

How­ever, the de­ci­sion was not unan­i­mous, as four mem­bers pre­ferred a re­duc­tion, while two mem­bers took an un­changed stance.

The Re­serve Bank’s gov­er­nor, Le­setja Kganyago, said that the MPC would pre­fer ex­pec­ta­tions to be an­chored closer to the mid-point of the tar­get range and said the cen­tral bank ex­pected in­fla­tion to re­main within the tar­get range of 3per­cent to 6per­cent un­til the end of 2019.

“A num­ber of risks to the in­fla­tion out­look per­sist and the MPC as­sesses the risks to the in­fla­tion out­look to be broadly bal­anced.

“Al­though the rand has been rel­a­tively re­silient, it re­mains vul­ner­a­ble to height­ened po­lit­i­cal un­cer­tainty, global mone­tary pol­icy de­vel­op­ments and pos­si­ble fur­ther credit rat­ings down­grades,” Kganyago said.

The bank’s lend­ing rate in South Africa de­creased to 10.25 per­cent this month from 10.5 per­cent last month.

The coun­try’s in­fla­tion was out­side the re­serve bank’s tar­get range for most of last year, reach­ing a seven-year high of 7 per­cent in Fe­bru­ary last year.

On Wed­nes­day, Sta­tis­tics SA re­ported that head­line in­fla­tion in South Africa fell to its low­est since Novem­ber 2015 af­ter the con­sumer price in­dex dipped to 5.1 per­cent year-on-year in June, eas­ing from the 5.4 per­cent recorded in May and against the gen­eral con­sen­sus of 5.2 per­cent.

FNB chief econ­o­mist Sizwe Nxed­lana said the cen­tral bank’s de­ci­sion to ease the pol­icy rate by 25 bps high­lighted that rel­a­tive to pre­vi­ous meet­ings, it was less con­cerned about long-term in­fla­tion, which was ex­pected to be sus­tain­ably within the bank’s tar­get.

“Lower than an­tic­i­pated in­fla­tion out­comes and the ab­sence of any ad­verse shocks, will most likely lead to fur­ther pol­icy eas­ing.

“How­ever, rel­a­tive to other eas­ing cy­cles we ex­pect this cy­cle to be shal­low.

“Mone­tary pol­icy tight­en­ing in the de­vel­oped mar­ket is one of the fac­tors that will limit the ex­tent to which pol­icy is eased lo­cally,” Nxed­lana said.

How­ever, he added that the cut was un­likely to have a ma­te­rial im­pact on eco­nomic growth, but would pro­vide mod­est re­lief for em­bat­tled con­sumers.

De­spite the de­cel­er­at­ing in­fla­tion­ary pres­sures, Kganyago cau­tioned that the bank would not hes­i­tate to re­verse yes­ter­day’s de­ci­sion if in­fla­tion seemed to be pick­ing up as it re­mained con­cerned about the de­te­ri­o­ra­tion in the growth out­look over the fore­cast pe­riod.

“It is un­clear where the driv­ers of ac­cel­er­ated growth will come from in the ab­sence of cred­i­ble struc­tural pol­icy ini­tia­tives that will re­duce un­cer­tainty and in­crease busi­ness and con­sumer con­fi­dence.”

Last month, the Rand Mer­chant Bank/Bureau for Eco­nomic Re­search (BER) busi­ness con­fi­dence in­dex showed that busi­ness con­fi­dence fell to the worst level since the 2008/09 re­ces­sion.

This is af­ter the in­dex was recorded at 29 in­dex points in the sec­ond quar­ter of this year from the 40 recorded in the first quar­ter.

Last week, the FNB/BER con­sumer con­fi­dence in­dex (CCI) fell to its long­est streak where con­sumer con­fi­dence has been at or be­low zero since the sur­vey started in 1982. The CCI was recorded at mi­nus nine in the sec­ond quar­ter from mi­nus five in the first quar­ter.

PHOTO: JAC­QUES NAUDE

Re­serve Bank gov­er­nor Le­setja Kganyago an­nounc­ing the out­come of the mone­tary pol­icy com­mit­tee meet­ing yes­ter­day.

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