The Reserve Bank’s Monetary Policy Committee (MPC) unanimously decided to keep the main lending rate at 6.5%. The banks’ prime lending rate is thus 10%.
Reserve Bank Governor Lesetja Kganyago made the announcement on Thursday in the capital.
This is the Central Bank’s penultimate announcement for the year. It follows a 25-basis point cut in the July meeting.
It repeated calls for structural reforms to raise potential growth rate, saying weakness in many sectors of the economy remained a cause for concern. The following are highlights from Kganyago’s speech:
“The medium-term inflation outlook is largely unchanged.”
Electricity, food & fuel price inflation continue to shape the near & medium-term trajectory of headline inflation. Fuel price inflation is expected to average 2.4% in 2019 & to peak at 11.8% in Q1 of 2020. While food price inflation is expected to peak at about 6% in Q3 of 2020. pic.twitter.com/2FMnlBCy4W
— SA Reserve Bank (@SAReserveBank) September 19, 2019
SARB’s Quarterly Projection Model (QPM) sees headline inflation averaging 4.2% in 2019 (down from 4.4%); 5.1% in 2020 (unchanged); and slightly up to 4.7% (from 4.6%) in 2021. Headline CPI inflation is expected to peak at 5.3% in Q1 2020 and settle at 4.5% in Q4 2021. The forecast for core inflation is lower at 4.3% in 2019 (down from 4.4%), unchanged at 4.7% in 2020 and slightly higher at 4.6% in 2021 (up from 4.5%).
The Bureau for Economic Research’s (BER’s) Q3 survey sees headline inflation down slightly for 2019 at 4.6% (from 4.8%); unchanged at 5% in 2020; and eased from 5.2% to 5.1% for 2021, reaching the lowest levels since 2007.
Global GDP is expected to slow to 3.2% in 2019 and rise to around 3.5% in 2020. “While global growth remains resilient, recent indicators on trade and manufacturing have deteriorated and a range of downside risks to growth remain.
“In the second quarter of this year, South Africa‘s GDP rebounded from the contraction experienced in the first quarter, but economic activity levels still remain weak. Based on recent short-term economic indicators for the mining and manufacturing sectors, the third quarter GDP outcome is expected to be muted.”
The forecast of GDP growth for 2019 remains unchanged at 0.6%. The forecasts for 2020 and 2021 have decreased to 1.5% (from 1.8%) and 1.8% (from 2.0%), respectively, due to revisions to global growth and domestic potential growth. pic.twitter.com/7J7ZHWo2NU
— SA Reserve Bank (@SAReserveBank) September 19, 2019
Since the July MPC, the rand has depreciated 4.6% against the US dollar, and by 3% against the euro.
“The QPM assesses the rand to remain slightly undervalued. While the rand has benefited from improvements in global sentiment, investors remain concerned about domestic growth prospects and fiscal risks.”
Prior to the meeting, analysts generally predicted that rates would be kept steady. However there was a mixed reaction to the MPC’s decision.
The Steel and Engineering Industries Federation of Southern Africa (Seifsa) Economist Marique Kruger said the decision bodes well for struggling businesses in the metals and engineering (M&E) sector and provides certainty in making key decisions affecting individual cost curves. “The bank’s decision was expected, especially given the current state of the domestic economy, which is in dire need of any kind of boost to ignite business activity.”
Mike Greeff, CEO of Greeff Christies International Real Estate said the MPC’s decision signals that Sarb “is satisfied with the current economic status of the country and is happy to adopt a ‘wait and see’ attitude with regard to balancing the growth of the economy versus keeping inflation under control.
“The committee’s decision to not meddle with South Africa’s economic status quo should be seen as good news for the real estate sector. There has been some promising growth in the market and while it has not matched the growth of previous years, it is still a positive indicator.”
Samuel Seeff, chairman of the Seeff Property Group found the decision “disappointing”, calling for bold action to stimulate the economy and property market. “We have only had one 25bps rate cut this year (in July) and it is simply not enough. There is ample support for a further rate cut. The second quarter GDP growth of 3.1% was better than expected and inflation, despite slightly up to 4,3% in August, remains fairly benign and well within the bank’s target range of 3%-6%.
“Simply put, a bold rate cut fuels economic activity as it makes it cheaper for businesses and consumers to borrow. The SA economy is struggling, and sentiment and lack of political confidence in the market remains worryingly low. A cut in the interest rate would assist, especially since business confidence is at its lowest point in 20 years.”
Similarly, Pam Golding CEO Dr Andrew Golding said while the decision is positive for stability, it’s unlikely to stimulate increased activity in property. “A further interest rate reduction, on the back of the previous cut in July this year, would have collectively provided incentive for favourable buyer decisions.
“What is needed right now is a meaningful confidence boost to offset the global and local macroeconomic and socio-political factors impacting on the market and jump-start the muted economy and create impetus in the property market.”