South Africa: SARB cuts rate by 25 basis points amid precarious economic conditions
July 18, 2019
At its meeting ending 18 July, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) unanimously opted to cut the repurchase rate by 25 basis points to 6.50%, after holding rates for eight months. The decision had been widely expected by market analysts.
The SARB’s lower growth projection for this year, which was slashed to 0.6% (previously: 1.0%) amid a “persistently uncertain environment”, coupled with declining inflation expectations for this year (4.4%; previously: 4.5%), prompted the rate cut. A sharper-than-feared contraction in Q1, mainly owing to rolling power outages, along with rising downside risks stemming from weaker-than-expected global economic activity amid escalating trade war tensions, were behind the downgrade. While early second-quarter indicators hint at some respite, concerns linger over longer-terms risks linked to bleak prospects for investment in the absence of reforms. However, as these are “structural in nature”, the Bank noted that monetary policy alone cannot be relied upon to resolve them.
Risks to the inflation outlook are seen as being largely balanced. Nevertheless, policymakers struck a cautious tone, noting that the bailout of heavily indebted state-owned utility providers, especially Eskom, higher utility prices and abrupt shifts in global market sentiment pose significant upside risks to the inflation outlook. In line with the projected containment of inflationary pressures, the Bank’s current model projected only one 25-basis-point cut by year-end. Given the precarious state of the economy, most FocusEconomics panelists now see the Bank rate being held steady into next year.
The MPC’s next meeting will be held on 17–19 September.
Author: Nihad Ahmed, Economist