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Reserve Bank announces surprise interest rate cut

The South African Reserve Bank’s surprise decision to cut interest rates by 0.25% offers some reprieve for financially strained South Africans.

Announcing the outcome of the Reserve Bank’s monetary policy committee (MPC) on Thursday afternoon, governor Lesetja Kganyago said the bank’s repo rate would be cut to 6.75%. The prime lending rate will resultantly drop from 10.5% to 10.25%, offering consumers some welcome relief.

Influencing the MPC’s decision is inflation has remained within the Reserve Bank’s target range of 3% to 6%. Its forecast for headline inflation had been revised down to 5.3% for 2017. 

On Wednesday, Statistics South Africa reported consumer price inflation at 5.1% for June, down from 5.4% in May. The Reserve Bank’s measure of core inflation, which excludes food, fuel and electricity, was 4.8% in both months and it anticipates core inflation will stay at this level for 2017 and 2018.

“The inflation outlook has improved significantly since the previous meeting of the MPC and has been fairly broad-based,” Kganyago said. “The lower core inflation outlook is indicative of weaker underlying inflation pressures, at a time when the impact of exogenous shocks on headline inflation has been dissipating.” 

Although the cut offers some welcome relief, it is enabled by South Africa’s stalled economic growth.

“Domestic growth prospects have deteriorated further following the surprise GDP [gross domestic product] contraction in the first quarter of 2017. The economy has now recorded two successive quarters of negative growth and, although a near-term improvement is expected, the outlook remains challenging,” Kganyago said. 

“A number of sentiment indicators and data points have reached levels last seen during the 2009 recession, at the height of the global financial crisis.”

The global growth backdrop remains positive, with sustained upswings evident in most regions, according to Kganyago, who noted that underlying global inflation trends remain benign, with inflation below target in most of the advanced economies, notwithstanding the positive growth prognosis and tightening labour markets. 

“Despite the absence of inflationary pressures, central banks in a number of advanced economies have signalled intentions to move from highly accommodative monetary policy stances. These countries include the US, the UK, the euro area and Canada. This process is unlikely to be smooth or perfectly synchronised and could generate bouts of uncertainty,” Kganyago said.

The rand’s relative resilience in recent weeks had been underpinned by the generally positive sentiment towards emerging markets, as well as by sustained trade surpluses, Kganyago said. 

“The current account deficit is still expected to widen over the forecast period, but the degree of widening has been revised down.” 

But he warned that the rand remains vulnerable to increased global risk aversion, domestic political shocks and to the possibility of further ratings downgrades.

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