South Africa Leaves Benchmark Rate Interest Unchanged

(Bloomberg) -- The South African Reserve Bank left the benchmark interest rate unchanged, ending its easing cycle even as it now sees the economy contracting more than it projected in July and inflation remaining well inside its target band.

The monetary policy committee voted to hold the repurchase rate at 3.5%, Governor Lesetja Kganyago said Thursday. Of the five members on the panel, three favored an unchanged stance and two preferred a 25 basis-point cut. The key rate remains at the lowest level since it was introduced in 1998.

A lockdown that’s been in place for six months and shuttered most activity in April and May pushed Africa’s most-industrialized economy into its longest recession in 28 years. That also means the impact of the 300 basis points of easing this year is yet to filter through, Kganyago said.

The central bank now sees gross domestic product shrinking by 8.2% in 2020 compared with its July estimate of a 7.3% decline. The MPC projects a rebound to growth in the next two years. It has raised its projections for 2021 to 3.9% from 3.7% and lowered the forecast for 2022 to 2.6% from 2.8%.

What Bloomberg’s Economist Says

“Today’s rate decision takes another rate cut off the table, in our view. This reflects the aggressive front-loading of rates by the bank this year, and the delay of Statistics South Africa’s publication schedule as it means that underperforming GDP data will continue to be viewed as backward looking.”

--Boingotlo Gasealahwe, Africa economist. Click here for the full REACT

While Kganyago said the central bank will continue to deploy its tools as appropriate as new data comes through, the market is not betting on any more easing. Forward-rate agreements jumped on the announcement to price out any chance another rate cut. Instead, traders are positioning for increases from the second half of 2021.

“If you were going to sneak in another rate cut, I would have done it today,” said Nicky Weimar, chief economist at Nedbank Ltd. in Johannesburg. “I think that’s it for this year. If you can’t justify cutting now, it’s going to be harder when the economy starts to recover and oil prices start to rise.”

‘Well Contained’

Inflation moved up back into the central bank’s target band in July, ending its first stint in 15 years below the 3% lower boundary of the range. The central bank cut its price-growth forecast for this year and 2021 and said the rate will remain “well contained” and below 4.5% until 2022.

Of the 17 economists in a Bloomberg survey, nine predicted a 25 basis-point reduction and the rest forecast the unchanged stance. The bank’s quarterly projection model now forecasts a repurchase rate of 3.44% by the end of this year and 4.03% by the end of 2021.

“We do not expect further interest rate cuts during the remainder of 2020,” Christie Viljoen, an economist at PwC in Cape Town, said by email. “The MPC statement indicates that its internal model does not suggest further monetary policy easing this year. In fact, the governor warned that lending rates could start rising in the second half of 2021.”

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