South Africa Central Bank's Rate Cut to 6.5% May Be It for Now

(Bloomberg) -- The South African Reserve Bank’s move to cut its benchmark lending rate to a two-year low may be the last loosening of monetary policy for a while.

The central bank’s Monetary Policy Committee voted to trim the repurchase rate by 25 basis points to 6.5 percent, Governor Lesetja Kganyago told reporters Wednesday in the capital, Pretoria.

The second rate reduction since July comes as inflation slowed to a three-year low February, moving well below the midpoint of the central bank’s target range of 3 percent to 6 percent, and 2017 economic growth exceeded forecasts. It could add to the positive sentiment that gained momentum when Cyril Ramaphosa succeeded Jacob Zuma as president last month, boosting business and consumer confidence and the currency.

“While these developments are welcome, the MPC would prefer to see inflation expectations anchored closer to the midpoint of the target band,” Kganyago said. The central bank hasn’t started “a journey of cutting,” he said, with decisions “highly data-dependent.”

Target Band

The central bank forecasts inflation will remain in the target band until at least the end of 2020, peaking at 5.5 percent in the first quarter of next year.

South Africa Central Bank's Rate Cut to 6.5% May Be It for Now

There would have to be something changing “quite substantially to pull inflation even lower between now and the May MPC meeting in order to actually move with another cut that soon,” Gina Schoeman, an economist at Citibank Inc. said by phone from Johannesburg.

Forward-rate agreements, used to speculate on interest rates, advanced for the first time in seven days, with those starting in eight months adding four basis points to 6.66 percent.

South Africa Central Bank's Rate Cut to 6.5% May Be It for Now

The reduction was in line with all except four of the estimates by 16 economists in a Bloomberg survey. Four MPC members voted for a cut and three favored unchanged policy, Kganyago said. After more than three years with an even number, the panel now consists of seven people following the appointment of Fundi Tshazibana last month.

What Our Economists Say

“The close vote indicates a high barrier for further cuts in the near term. Further cuts in the 2019 growth forecast and inflation expectations will be key triggers for additional interest rate cuts. We expect the central bank to keep the policy rate on hold at 6.50% for remainder of 2018.”

Mark Bohlund, Bloomberg Economics

The central bank increased its economic growth forecast for this year to 1.7 percent from 1.4 percent and trimmed its prediction for 2019 to 1.5 percent from 1.6 percent, saying the outlook remains challenging.

“Unless we are wrong about the speed with which growth in South Africa is likely to turn around, especially on the demand side, we see little scope for easing after this,” Razia Khan, head of macroeconomic research at Standard Chartered Bank Plc, said in an emailed note.

Dodged Junk

South Africa escaped a third junk credit rating last week when Moody’s Investors Service kept its assessment of the nation’s debt unchanged and raised the outlook to stable from negative, citing new political leadership.

The rand gained after Ramaphosa replaced Zuma as leader of the ruling African National Congress in December. The central bank’s model assesses the currency to be “somewhat overvalued,” and further strengthening potential is probably limited, Kganyago said.

The rand weakened 0.6 percent to 11.7337 per dollar by 5:49 p.m. in Johannesburg, leading emerging-market currency declines against the greenback. Yields on benchmark rand government bonds due 2026 climbed for the first time in six days, adding three basis points to 7.92 percent.

©2018 Bloomberg L.P.

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