South Africa

South Africa Monetary Policy January 2020

South Africa: SARB slashes rates in January

At its meeting ending 16 January, the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) unanimously decided to axe the repurchase rate by 25 basis points to 6.25%. The move, which surprised analysts, left the rate at its lowest point since December 2015.

The cut reflected a dovish revision to the Bank’s inflation outlook amid subdued price pressures and muted economic activity at the end of last year. Inflation logged 3.6% in November (October: 3.7%) and has thus remained below the 4.5% mid-point of the SARB’s target rate since July 2019, weighed on by lackluster domestic demand and a slight appreciation of the rand in H2 2019. Against this backdrop, the Bank revised down its inflation and GDP growth projections for 2020 and 2021, and thus opened room for a rate cut.

In its forward-looking guidance, the Committee hinted that further monetary easing was likely ahead provided risks to inflation remain balanced and given risks to the growth outlook are skewed to the downside due to supply-side constraints and a cashed-strapped public sector.

Commenting on the outlook, Sonja Keller, senior economist at JPMorgan, noted:

“One caveat is that a May cut still hinges on how fiscal risks map into the exchange rate this year, i.e. either the sovereign is not (already) downgraded in late March by Moody’s or, alternatively, the impact on USD/ZAR beyond potential initial volatility is limited, consistent with our base case view. As indicated earlier this week, we see a relatively broad range of growth outcomes this year; while demand side drivers probably cap growth to 0.7% or so this year, supply side constraints in the form of electricity cuts may substantially curb momentum further (range of -0.2% to 1%). One likely consequence is that the February budget update probably only marginally improves on the dismal MTBPS outlook (and the eventual actual fiscal outcome for FY2020/21 probably is worse than what was envisaged in the MTBPS).”

The MPC’s next meeting will be held on 19 March 2020.

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