News & analysis

The South African Reserve Bank unexpectedly cut rates yesterday alongside downgrades to both their CPI and growth projections from November’s forecasts.

The key rate now sits at its lowest level, but judging by the sanguine reaction of markets, investors were anticipating the cuts more than the analysts’ projections suggested. Only 3 out of the 19 analysts polled by Bloomberg predicted a 25bp cut at the meeting.

Governor Kganyago announced that the Monetary Policy Committee unanimously voted to lower its policy rate, the repurchasing rate, by 25bps this afternoon due to economic conditions deteriorating substantially since November.

The unanimity of the decision highlights the growing shift in the central bank towards stimulating growth as a rate cut was avoided at the last meeting by 3 votes to 2.

The central bank’s quarterly projection model now forecasts the repo rate to close out there year at 6.1%, suggesting another 25 basis point cut is soon to come in Q4.

Arguably, the predictive model could readjust significantly after the State of the Nation Address (SONA) on February 13th and the medium-term budget announcement which is also due next month prior to Moody’s ratings decision in March – the first since the rating agency downgraded its outlook on South Africa’s sovereign debt profile to negative in November.

The bank’s expectations of growth in 2019 have been downgraded from 0.5% to 0.4%.

With the economy dodging its second recession threat in 2 years back in 2019, while growth is expected to come in at 1.2% in 2020 (down from 1.4% predicted back in November). Meanwhile, both headline and core inflation projections were also lowered to 4.7%  4.3% respectively in 2020.

The move by the SARB is arguably warranted with the consumer currently under a great deal of pressure. Unemployment levels currently sit at a staggering 29% and the adjustment by the SARB could be the first steps towards a more growth orientated mandate, which was previously suggested back in 2019 to much political backlash.

The 25 basis point cut will do little to fix the structural imbalances in South Africa’s economy, which hinge on the fiscal response in the coming months, but may soften the downside risks to inflation from moderating growth levels. For now, the cut itself will help anchor inflation expectations, which the SARB desperately wants at the 4.5% YoY level.

The pre-emptive strike by the central bank is deemed sufficient by FX markets that are arguably more forgiving under a much improved risk climate.

That may not last, however, as global cutting cycles begin to slow and a period of rate stagnation lingers in developed economies.



Author: Simon Harvey, FX Market Analyst at Monex Europe. 
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