South African Central Bank Signals Possible End to Hiking Cycle

(Bloomberg) -- South Africa’s Reserve Bank left interest rates unchanged for a third straight meeting as it signaled it may be close to the end of its policy-tightening cycle.

The central bank kept the benchmark repurchase rate at 7 percent, Governor Lesetja Kganyago told reporters Thursday in the capital, Pretoria. This was in line with the forecasts of all 27 economists in a Bloomberg survey.

“The MPC is of the view that should current forecasts transpire, we may be close to the end of the tightening cycle,” Kganyago said.

South African Central Bank Signals Possible End to Hiking Cycle

VIDEO: Kganyago’s News Conference in Full

SARB/Bloomberg

The Monetary Policy Committee has raised the key lending rate by 200 basis points since the start of 2014 in a bid to limit price growth to within its 3 percent to 6 percent target band. It left borrowing costs unchanged since March to help support an economy forecast to expand at the slowest pace this year since a 2009 recession due to weak export demand, the worst drought in more than a century and low commodity prices.

The central bank increased its growth forecast for 2016 to 0.4 percent from 0 percent, Kganyago said. Inflation is now expected to average 6.4 percent this year, compared with 6.6 percent predicted in July, he said.

Inflation Slowed

While price growth slowed to 5.9 percent in August, the first time this year the rate fell below the upper end of the central bank’s target band, Kganyago said inflation will only return to the band sustainably in the second quarter of next year.

“The MPC remains concerned about the overall inflation trajectory which remains in the upper end of the inflation target range,” he said. “The committee is aware that a number of the favorable factors that have contributed to the improved outlook can change very quickly resulting in a reassessment of this view.”

Inflation expectations, as measured by the five-year breakeven rate, fell to the lowest since April 2015. The rand regained all of the ground it lost against the dollar since the first reports on Aug. 23 that the police want to question Finance Minister Pravin Gordhan in relation to a special investigative unit established during his tenure at the revenue service. The currency remains vulnerable to domestic political events, a possible credit-rating downgrade and changes in U.S. monetary policy, Kganyago said.

“We’ve had a baseline view for some time that the hiking cycle is done and that rates remain unchanged from here on until the end of 2017,” Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said by phone. “There’s no real reason, with inflation in the target over the medium term, to hike rates.”

South African Central Bank Signals Possible End to Hiking Cycle

The rand has strengthened 14 percent against the dollar this year after losing over 25 percent of its value in 2015. The currency was 0.2 percent stronger at 13.5450 per dollar by 4:27 p.m. in Johannesburg on Thursday after earlier reaching 13.3790 per dollar. Yields on rand-denominated government bonds due December 2026 fell nine basis points to 8.53 percent.

The MPC’s decision was unanimous and a rate cut wasn’t discussed, Kganyago said. The bar for monetary accommodation remains high as the committee would like to see a “significant and sustained” decline in inflation, he said.

“We anticipate that the Reserve Bank will retain a cautious bias,” Manisha Morar, an economist at ETM Analytics, said by phone. “We do have one more MPC meeting scheduled for this year in November. If anything, we potentially see the market pricing for the possibility of a rate cut in the second quarter of 2017.”