The South African Reserve Bank has given borrowers a little Easter holiday gift, announcing a 25 basis point cut in interest rates on Wednesday.
The central bank cut the repo rate to 6.5%, its governor, Lesetja Kganyago, said, following “heated” debate among the bank’s monetary policy committee (MPC) members. Four members favoured a reduction but three wanted it to remain unchanged.
The cut was despite concerns about effect the 1% value-added tax (VAT) increase announced in the February budget could have on prices. But the bank decided the positive moves in the rand’s exchange rate, which has strengthened recently on the back of increasingly positive market sentiment and an improved credit outlook by ratings agency Moody’s, will help to counteract the effect of the VAT hike.
“While the increase in the value-added tax rate to 15% places temporary upside pressure on inflation, this is mitigated by the stronger exchange rate, which has contributed to the changing inflation risk profile,” Kganyago said in his statement on the rates decision.
But, he warned, because of the uncertain economic environment, future policy would “be highly data- dependent and sensitive to the assessment of the balance of risks to the outlook decisions.”
Kganyago added: “We have not started a journey of cutting. Every MPC meeting is different.”
The chief executive of FNB, Jacques Celliers, said the cut would uplift consumers and keep interest rates at attractive levels for investors in developed countries.
Lower consumer price inflation, which declined to 4% in February, was key to this decision, said Celliers, as was the favourable decision by Moody’s to change its outlook on South Africa from “negative” to “stable”.
Luigi Marinus, the portfolio manager of PPS Investments, said the rate cut offered a “welcome relief for South African consumers ahead of the looming 1% VAT increase”.
But the decision countered the most recent move by the United States Federal Reserve to raise rates by 25 basis points. It has signalled that more rate hikes could be in the offing.
Kganyago said that, although some of the key domestic uncertainties that had overshadowed the inflation outlook in previous MPC meetings had abated, risks remained, including the effect of global monetary policy normalisation on the rand.
“The exchange rate is currently assessed to be less of a risk to the inflation outlook,” he said. “However, the rand will remain sensitive to a faster pace of normalisation in the advanced economies, possible heightened global financial market volatility, as well as domestic developments.”
Local developments included the effect the public sector wage agreement would have on other wage increase expectations.
“Public sector wage settlements actually do have an impact on the settlements that other sectors agree to,” he said.