The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has elected to cut the prime lending rate for the first time since March 2018, by 25 basis points, to 6,5%.
The decision was unanimous, says SARB Governor Lesetja Kganyago.
The market had widely expected a rate drop, with economists noting there was enough room for a cut. Economists added that the move would help reignite some activity in the market and start a series of cuts that could total as much as 75 basis points over six months, Bloomberg reported.
This would support a fragile recovery in sales and consumer confidence by reducing the cost of debt.
In his address on the MPC outcomes, the Reserve Bank Governor was frank about the many problems still facing the country – despite some stabilisation in inflation, which is in the middle of the 3–6% range, and the rand/dollar exchange rate.
He noted that GDP contracted by 3,2% in the first quarter, reflecting weakness in most sectors of the economy.
The sharp quarterly decline was primarily caused by electricity shortages and strikes that fed into broader weakness in investment, he said, while the economy was also hit by household consumption and unemployment growth.
However, based on recent short-term indicators for the mining and manufacturing sectors, a rebound in GDP is expected in second-quarter 2019, he said.
The SARB cut South Africa’s growth forecast and now expects GDP growth for 2019 to average 0,6% (down from 1,0% in May). The forecast for 2020 and 2021 is unchanged at 1,8% and 2,0% respectively.
In terms of inflation, SARB assesses the overall risks to the inflation outlook as largely balanced. Demand-side pressures are subdued, wages and rental prices are expected to increase at moderate rates, and global inflation should remain low.
‘In the absence of shocks, relative exchange rate stability is expected to continue,’ Kganyago said. However, he noted that the impact of upside risks to the inflation outlook could still be significant – particularly with hovering uncertainty over global trade wars, as well as local issues around state-owned companies.
‘Global financial conditions can abruptly tighten due to small shifts in inflation outlooks in advanced economies and changing market sentiment. Domestically, the financing needs of state-owned enterprises could place further upward pressure on the currency and long-term market interest rates for all borrowers.’
Food, electricity and water prices also remain important risks to the inflation outlook, he said.