South Africa

South Africa Monetary Policy November 2019

South Africa: SARB keeps rates on hold despite risks to the outlook

At its meeting ending 21 November, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) held the repurchase rate at 6.50%, as was expected by most market analysts. The MPC, however, was divided on the decision, with three members in favor of remaining put and the other two opting for a 25-basis-point cut.

Despite the headline inflation easing for the third month running in October amid weak activity, along with inflation expectations which have been falling more gradually, the Bank held the rate steady as it would like to see inflation expectations anchored closer to the midpoint of the Bank’s target range amid balanced risks to the medium-term inflation outlook. Inflation fell to an over eight-year low of 3.7% in October from 4.1% in September, due to softer price increases for food and non-alcoholic beverages, and housing and utilities. A slight appreciation in the rand since August has also exerted downward pressure on prices. Meanwhile, expectations for inflation edged down to 4.6% for 2019 (previously: 4.8%), hovering slightly above the 4.5% mid-point of the Bank’s target band, while remaining unchanged at 5.0% for 2020.

The risks to the medium-term inflation outlook are seen to be balanced. On the one hand, demand side pressures remain muted, with food inflation surprising to the downside; on the other hand, the Bank noted upward pressures stemming from rising imported food prices, higher wages and increasing fuel, electricity and water prices. Looking ahead, the SARB provided little forward guidance, simply stating that it will continue to anchor inflation expectations close to the mid-point of the inflation target, while remaining cautious of the assessment of risks to the outlook.

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

“The MPC’s decision and statement today reflect a Central Bank reluctant to lower the policy rate amid prevalent fiscal risks, but near-stalling growth and lower inflation increasingly weigh on the committee in a slow crawl towards easing, in our view […] Our projections continue to envisage a 25bp rate cut in 1H20, penciled in for March 2020, while acknowledging unusual high uncertainty around the timing of the cut. Our forecasts envisage below-5% inflation over the medium-term as well as substantially lower GDP growth, structurally as well as cyclically. We believe incremental downward revisions to growth and inflation projections by the SARB eventually should further lower the projected repo rate and tilt the majority of the committee towards a cut.”

The MPC’s next meeting will be held on 14–16 January 2020.

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