Low inflation forces interest rate cut
Benchmark repo rate now at 6.75% in first cut since 2012
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.