Reserve Bank cuts repo rate by 25bps to 6.5%
The Reserve Bank has cut the repo rate by 25 basis points (bps), in line with expectations, which will come as a relief for SA’s constrained consumers.
Out of 22 economists polled by Bloomberg, 17 expected a rate cut of 25bps, one expected a cut of 50bps and four expected the Bank to keep rates unchanged.
Consumers have come under pressure with tax increases, slightly higher debt-service costs, and higher fuel and administered prices. Low inflation, weak growth, a stable rand and firm intentions from the US to lower interest rates cemented the case for an interest-rate cut.
The Bank slashed its GDP growth forecast for the year from 1% to 0.6% while inflation is expected to average 4.4% in 2019, below the midpoint of the target range, from a previous 4.5%.
“Domestic growth prospects and fiscal risks rate high among investor concerns,” Reserve Bank governor Lesetja Kganyago said.
Most major central banks have also adopted more dovish tones, while US Federal Reserve chair Jerome Powell hinted that the Fed may cut interest rates at its next meeting at the end of July.
“Since the May meeting of the monetary policy committee (MPC), near-term indicators point to weaker-than-anticipated global economic activity. Global financial conditions have eased, as central banks in advanced economies signaled a move towards monetary accommodation,” Kganyago said.
Recent inflation updates and inflation expectations show inflation at or near the midpoint of the 3%-6% target range while the economy took a knock in the first quarter with a steep contraction of 3.2%.
“Recent communication by the US Fed and the European Central Bank (ECB) indicate that, in the absence of significant shocks, monetary policy will remain accommodative over the medium term,” Kganyago said.
These shocks could arise from escalating trade and geopolitical tension. “However, market expectations of the extent of future central bank actions appear high, creating the risk of significant market volatility should these not materialise.”
• 2019: 4.4% from 4.5% in May
• 2020: Unchanged at 5.1%
• 2021: Unchanged at 4.6%
Inflation is now expected to peak at 5.4% in the first quarter of 2020.
GDP growth forecasts:
• 2019: 0.6% from 1% in May
• 2020: Unchanged at 1.8%
• 2021: Unchanged at 2%