South Africa Holds Key Rate as It Cuts GDP Growth Forecasts

JOHANNESBURG (Capital Markets in  Africa) – Higher power, food and fuel prices will likely crimp household spending and limit prospects for stronger economic growth, resulting in the South African Reserve Bank having to hold the nation’s key interest rate for the rest of the year, economists said.

The Monetary Policy Committee’s unanimous decision to maintain the repurchase rate at 6.75 percent was in line with the expectations of all 18 economists in a Bloomberg survey. The bank cut its forecasts for growth in gross domestic product both this year and next, and sees growth in household expenditure slowing to just 1 percent in 2019, Governor Lesetja Kganyago said Thursday in the capital, Pretoria. The bank’s quarterly projection model implies one increase of 25 basis points by the end of the year.

The bank held its inflation expectations even after electricity-tariff increases granted to cash-strapped state power company Eskom Holdings SOC Ltd.overshot the MPC’s assumptions in its January forecast. It sees inflation averaging 4.8 percent this year. It seeks to anchor price growth close to the 4.5 percent mid-point of its target range to allow for flexibility in protecting the economy from price shocks.

“Despite what the QPM suggests, I think this is a story of unchanged interest rates for quite some time,” said Elize Kruger, a senior economist at NKC African Economics. “If anything, headline consumer-price inflation could be lower than what they are forecasting — despite factoring in higher electricity, food and fuel prices the forecast is unchanged.

Power-supply constraints and weak business confidence will likely limit near-term production and investment prospects, the governor said. The bank lowered its growth outlook to 1.3 percent from 1.7 percent as rolling blackouts damp prospects of a strong recovery from last year’s recession. Africa’s most-industrialized economy hasn’t grown by more than 2 percent a year since 2013.

“The committee remains of the view that current challenges facing the economy are primarily structural in nature,” Kganyago said. “Given current economic vulnerabilities, prudent macroeconomic policies combined with structural reforms that raise potential growth and lower the cost structure of the economy, have become even more urgent.”

Since Cyril Ramaphosa replaced Jacob Zuma as president a year ago, after winning the party leadership vote by the narrowest of margins, opponents within his African National Congress have retained some top ANC and state posts and advocated policies such as land seizures that have harmed investor confidence.

The search for a third deputy governor and sixth member of the MPC continues after Francois Groepe resigned in January. His successor will be the first senior executive at the central bank to be appointed Ramaphosa.

What Bloomberg’s Economist Says
“The Reserve Bank made sharper cuts than expected to its growth and inflation forecasts for 2019. This, together with a tumble in inflation expectations lowers the barrier for the Reserve Bank shifting back to supporting economic growth. We retain our forecast for the Reserve Bank to remain hold but now see it as likely that coming meetings may see dissenting votes for cutting rates.” –Mark Bohlund, economist

Source: Bloomberg Business News