South Africa

South Africa Monetary Policy September 2019

South Africa: SARB keeps interest rates unchanged despite concerns about economic growth

At its meeting ending 19 September, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) unanimously decided to keep the repurchase rate unchanged at 6.50%, after having cut rates by 25 basis points at its previous session. The decision somewhat surprised a divided market, given that some analysts had expected a cut.

Driving the call to keep interest rates unchanged were the SARB’s inflation expectations for this year, which continue to moderate gradually, and were revised down since the last meeting in July to 4.2% (previously 4.4%). Meanwhile, although GDP growth rebounded in the second quarter, the medium-term growth outlook remains muted amid weak employment prospects and declining business confidence. Consequently, while keeping its growth projection for this year unchanged at 0.6%, it cut the projections for 2020 and 2021 to 1.5% and 1.8%, respectively (previously reported: +1.8% and +2.0%, respectively). In this context, after recently having lowered rates and against the backdrop of increasing corporate and sovereign debt levels, the SARB decided to take a wait-and-see approach at this meeting. Furthermore, the Bank stressed the need for structural reforms as monetary policy alone cannot be relied upon to solve the challenges that the South African economy is facing.

Although risks to the inflation are seen as being largely balanced, inflationary pressures from the demand-side are subdued. That said, some upside risks to the inflation outlook remains due to supply-related factors, in particular fuel, electricity and water prices. Looking ahead, the SARB provided little forward guidance for the direction of monetary policy, simply stating that it will continue to anchor inflation expectations close to the mid-point of the inflation target, while it will be sensitive to the assessment of risks to the outlook.

Commenting on the outlook, the research team at Goldman Sachs, adds:

“With a forecast for inflation that remains considerably below the SARB’s, at 4.3% vs the SARB’s 5.1% for 2020, we maintain our forecast for 50bp of further rate cuts, delivered in two 25bp cuts in Q4 2019 and Q1 2020. We interpret today’s relatively hawkish policy decision and MPC statement as a reflection of a) a conservative assessment of external and local risks; and b) an ongoing effort to anchor inflation expectations close to the 4.5% mid-point of the inflation target range. Our expectation for another cut in the November MPC meeting is predicated on risks to the Rand — in particular stemming from the upcoming mid-term budget announcement (scheduled for Oct 30) — not materializing.”

The MPC’s next meeting will be held on 19–21 November.

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