South Africa: Central Bank unexpectedly cuts rate to support growth
July 20, 2017
The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) surprised market analysts by cutting the repurchase rate by 25 basis points to 6.75% at the end of the two-day meeting on 20 July. The decision marks the first rate cut in XX years and underscores the dire economic situation the country is currently in.
The economy entered its second technical recession since 2009 in the first quarter of this year as GDP contracted for the second consecutive quarter. The quarterly print confounded market analysts and the Bank had expected a mild expansion. It also underscored the country’s bleak economic outlook as growth was dragged down by a decline in manufacturing and services. The rapid deterioration of the growth outlook compelled the SARB to cut the rate. The Reserve Bank, however, considers that the effect of monetary policy on the economy is rather limited and is not “the solution to the structural growth constraints in the economy”. To improve growth prospects in the economy requires concrete policy action by the government to unleash faster growth and defuse political noise to boost consumer and business confidence. The Central Bank was able to cut the repurchase rate as inflation has been moderating at a faster-than-expected rate thanks to still-low oil prices and low food price inflation.
The Bank is taking a wait-and-see approach and left the door open to any rate cut or hike. The SARB said it would “remain vigilant and would not hesitate to reverse this decision” if inflationary pressures increase or economic risks deteriorate.