South Africa Holds Rate as Recession Trumps Market Turmoil

(Bloomberg) -- The South African Reserve Bank held its key interest rate at a two-year low as the economy struggles through a recession and policy makers warned that investor sentiment toward emerging markets is a risk to the currency and adds to inflation pressures.

The Monetary Policy Committee voted to hold the repurchase rate at 6.5 percent Thursday. Three of the MPC’s seven members votes to increase the rate by 25 basis points, a deviation from the July and May decisions, which were unanimous for holds.

South Africa Holds Rate as Recession Trumps Market Turmoil

The central bank has had to walk a tightrope -- balancing its goal of anchoring price growth close to the 4.5 percent midpoint of its target amid higher oil costs with the needs of a shrinking economy. The rand has lost 14 percent against the dollar this year as global trade wars and turmoil in other emerging markets fueled a sell-off in assets, complicating the bank’s task.

South Africa Holds Rate as Recession Trumps Market Turmoil

“The MPC assesses the risks to the inflation outlook to be on the upside,” Governor Lesetja Kganyago told reporters in the capital, Pretoria. The price-growth trajectory is moving further away from the target band’s midpoint, he said, adding that the implied path of policy rates generated by the bank’s quarterly projection model is for five increases of 25 basis points by the end of 2020.

The economy is weak and inflation is likely to remain within the bank’s target range, said Johannes Khosa, an economist at Nedbank Group Ltd. in Johannesburg.

“They will continue to talk tough but we don’t believe they will act immediately,” he said by phone. “They will wait for the second-round effects of inflation.”

See economists’ forecasts for the benchmark rate as surveyed by Bloomberg

While the central bank warned that currency weakness continues to pose a risk to inflation expectations, annual price growth decelerated from a 10-month high in July to 4.9 percent in August, remaining firmly in the bank’s target band of 3 percent to 6 percent.

Brazilian officials held the key rate at 6.5 percent Wednesday, while central banks in Russia and Turkey raised their benchmarks to support their currencies. The Federal Reserve may announce its third interest-rate increase for the year next week, which could lessen the appeal of some emerging-market assets.

Increase Risk

While Citigroup Inc.’s Gina Schoeman doesn’t forecast a rate increase for November, there is a probability of this happening because of Moody’s Investors Service review of South Africa’s debt, the medium-term budget on Oct. 24 and a decision on whether lawmakers will amend the constitution to make it easier for the government to expropriate land without compensation, all of which are potential risks to the rand.

“There’s a lot going on and the currency is clearly something that’s worrying them -- this could affect their forecasts further,” Schoeman said by phone.

The meeting was MPC member Brian Kahn’s last, reducing the committee’s size to six. That would give Kganyago the deciding vote in the case of a tie.

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