South Africa Cuts Key Rate for the First Time in Five Years

JOHANNESBURG (Capital Markets in Africa) – South Africa’s central bank cut borrowing costs for the first time in five years as inflation eases and after the country slipped into a recession.

The Monetary Policy Committee reduced its key rate by 25 basis points to 6.75 per cent, Governor Lesetja Kganyago told reporters Thursday in the capital, Pretoria, citing concern about the nation’s growth outlook. Only three of 23 economists in a Bloomberg survey predicted a reduction.

The cut is the first move since March last year when the central bank raised the rate by a quarter of a percentage point, bringing to 200 basis points the rate increases since 2014 as it sought to move price growth into the bank’s target range. Slow economic expansion due to weak demand for South Africa’s exports and political scandals have complicated the task of the central bank, which is also fighting off a challenge to its mandate by the anti-graft ombudsman.

“The MPC assesses the risks to the inflation outlook to be broadly balanced,” Kganyago said. “The MPC is concerned about the deterioration of the growth outlook.” Four of the six MPC members favoured a reduction, he said.

The economy contracted by an annualized 0.7 percent in the first quarter, pushing South Africa into a recession. The MPC reduced its forecast for growth this year to 0.5 percent from 1 percent, and trimmed the outlook for 2018 to 1.2 percent from 1.5 percent.

The bank expects inflation to remain within the target band of 3 to 6 percent until at least the end of 2019. It lowered the forecast for average price growth this year to 5.3 percent from 5.7 percent. Inflation will average 4.9 percent in 2018, it said.

Forward-rate agreements starting in five months, used to speculate on borrowing costs, dropped after the announcement and show traders are now pricing in another 51 basis points of rate cuts by the end of the year.

Cabinet Reshuffle
“They can probably cut another two to three times through the second half of next year, assuming the rand doesn’t blow out,” Rian le Roux, chief economist at Old Mutual Investment Group in Cape Town, said by phone. “If the rand is strong and inflation falls further, don’t rule out another cut before the end of the year.”

South African Reserve Bank Governor Lesetja Kganyago announced that the country’s benchmark rate will be cut to 6.75%

Slow growth, failure to tackle graft at state-owned companies and a shock cabinet reshuffle in March prompted two ratings companies to downgrade South Africa’s foreign debt to junk.

The Public Protector, the graft ombudsman, instructed lawmakers to start a process to amend the nation’s constitution to make the Reserve Bank focus on the “socioeconomic well-being of the citizens” rather than inflation. The lender has asked the courts to review and set aside the instruction and the ombudsman has been criticized by parliament and the ruling party.

The rand weakened as much as 1.2 percent after the decision and pared its losses to trade 0.3 percent lower at 13.9580 per dollar by 7 p.m. in Johannesburg on Thursday. Yields on rand-denominated government bonds due December 2026 fell 10 basis point to 8.54 percent, the lowest since June 26. The currency is vulnerable to political uncertainty and possible further credit-rating downgrades, Kganyago said.

While the rand has been supported by a narrower current account-deficit, the gap is expected to widen, he said. Africa’s most-industrialized economy relies mainly on foreign investment in stocks and bonds to help fund the shortfall and that liquidity may decrease as the U.S. Federal Reserve increases rates and the European Central Bank cuts back monetary stimulus.

“It may look like money will flow out now, but I think the emerging-market demand is still high enough for now,” Tertia Jacobs, a treasury economist at Investec Bank Ltd., said by phone from Johannesburg “Next year we may struggle to cut rates, so its best to do it now because the economy needs it and inflation is within target.”

Source: Bloomberg Business News