Divisions Emerge as Sarb Holds Rates, Cuts Growth Outlook

Divisions Emerge as Sarb Holds Rates, Cuts Growth Outlook

Sarb says inflation is falling but should go lower.

24 May 2019 – A divided South African central bank kept interest rates unchanged on Thursday, judging that signs of easing inflation and a slowing economy, that it believes shrank in the first quarter, were not strong enough to warrant a cut.

The bank, along with President Cyril Ramaphosa’s incoming administration, is under pressure to revive growth after a decade of policy missteps that have seen unemployment creep up to record highs and investment slow to a trickle.

“The committee assesses the stance of monetary policy to be broadly accommodative over the forecast period,” South African Reserve Bank (Sarb) Governor Lesetja Kganyago said after policymakers voted 3-2 to hold the benchmark repo rate at 6.75% for the third policy meeting in a row.

Thursday’s was the first meeting since Ramaphosa’s African National Congress party won a reduced majority in this month’s national election, and the fact that two of the five policymakers argued for a cut of 25 basis points was unexpected.

Some economists believe the Sarb should already be cutting rates to stimulate demand, particularly consumer spending, which accounts for 60% of gross domestic product but has been depressed for most of the last five years.

But all 30 economists polled by Reuters had forecast no change on Thursday, and the rand slipped to session low of 14.53 per dollar, its softest since May 3, soon after the decision.

Inflation expectations were at their lowest in 10 years, “but we would like to see them anchored closer to the midpoint,” Kganyago, whose five-year term expires in November, told reporters.

“Any future policy adjustments will continue to be data-dependent,” she added.

The bank’s target range for inflation, which fell to 4.4% in April, is between 3% and 6%.

It said it saw consumer price-growth averaging 4.5% in 2019, down from the 4.8% it forecast in March. Inflation would rise to 5.1% in 2020 before slowing to 4.6% in 2021, due mainly to lower food, oil and wage costs.

It cut its 2019 economic growth outlook to 1.0% from the it 1.3% forecast March, and said a first quarter GDP contraction was likely after weak mining and manufacturing data. In January it saw GDP accelerating 1.5% this year.

“Overall the meeting has been digested as downbeat and added risks lower for the rand,” Analyst FXTM Lukman Otunuga said in a note.

The bank’s Quarterly Projection Model (QPM) implies a 25 basis point rate cut by early 2020, compared to the 25 bps hike it pointed to at the March meeting. Source (Moneyweb) https://bit.ly/2WnHW8j