South Africa Central Bank Signals End of Rate-Increase Cycle

JOHANNESBURG (Capital Markets in Africa) – The South African Reserve Bank held its benchmark rate unchanged for a sixth straight meeting and said it may have reached the end of its policy-tightening cycle, even as the rand remains a risk to inflation.

Five of the six Monetary Policy Committee members voted to keep the repurchase rate at 7 percent, and one favoured a 25 basis-point cut, Governor Lesetja Kganyago told reporters Thursday in the capital, Pretoria. The decision is in line with the forecast of all 24 economists surveyed by Bloomberg.

The repurchase rate has been unchanged for a year after the central bank raised it by 200 basis points since 2014 to bring price growth to within the target band of 3 percent and 6 percent. After the inflation rate fell to 6.3 percent in February, the bank now projects price growth to return to within the target band in the second quarter and average 5.9 percent for the year, Kganyago said.

“The MPC is of the view that we may have reached the end of the tightening cycle,” Kganyago said. “However the committee would like to see a more sustained improvement in the inflation outlook before reducing rates.”

Bond yields fell and the rand extended gains after the announcement. The rand strengthened 1.4 percent to 12.8594 per dollar by 4:38 p.m. in Johannesburg, while the yield on benchmark government bonds due December 2026 dropped 23 basis points to 8.51 percent.

Forward-rate agreements, used to speculate on interest-rate moves, dropped as traders priced in a greater chance of policy easing. Contracts starting in six months fell 17 basis points to 17.16 percent, or 18 basis points lower than the benchmark Johannesburg interbank agreed rate.

Rate Cut
“I don’t think a rate cut is out the question now,” Elize Kruger, an economist at NKC African Economics, said by phone from Johannesburg. “It all depends on what happens with the rand, with where we are now politically.”

Slow economic expansion due to a drought and weak demand for local goods has complicated the bank’s task. So has volatility in the rand, which lost the most among all currencies tracked by Bloomberg after President Jacob Zumarecalled Finance Minister Pravin Gordhan from meetings with investors, sparking concern Gordhan would be fired.

“The rand has depreciated significantly in response to increased domestic political uncertainty and the exchange rate has re-emerged as an upside risk to the inflation outlook,” Kganyago said. “The possibility of significant overshooting of the exchange rate in the short run also cannot be ruled out.”

Inflation will probably average 5.4 percent in 2018 and quicken to 5.5 percent in 2019, Kganyago said.

“The longer the current situation in politics persists, the more it will hurt the rand and therefore inflation expectations,” Isaac Matshego, an economist at Nedbank Ltd. in Johannesburg, said by phone. “Until we know really how this grand saga with Gordhan is going to play out I would not rule out chances of a cut.”

Africa’s most-industrialized economy grew 0.3 percent last year, the slowest rate since a 2009 recession, according to the statistics agency. The MPC raised its 2017 economic growth forecast to 1.2 percent from 1.1 percent and increased the 2018 prediction to 1.7 percent from 1.6 percent.