The SA Reserve Bank’s Monetary Policy Committee (MPC) has decided to reduce the repo rate by 25 basis points to 6.25% from 6.5% – a unanimous decision.
The MPC decided to reduce the repurchase rate by 25 basis points to 6.25% per annum. pic.twitter.com/NgAESaShWj
— SA Reserve Bank (@SAReserveBank) January 16, 2020
Headline CPI inflation is expected to peak at 4.9% in the final quarter (Q4) of 2020 and settle at 4.5% in the third quarter of 2021 (one quarter earlier).
The forecast for core inflation for 2019 is unchanged at 4.2%, is 4.3% in 2020 (down from 4.5%) and 4.4% in 2021 (down from 4.6%). The Bank’s forecast for core inflation for 2022 is 4.5%.
In a statement sent after the bank’s decision, the Bureau for Economic Research’s (BER’s) Inflation Expectations Survey 19Q4 revealed that in Q4 2019, average inflation expectations for 2019, 2020 and 2022 declined further.
“Analysts, business people and trade union representatives on average expect headline inflation to be 4.5% in 2019 (0.1% point lower than previously), 4.8% in 2020 (-0.2% points) and 5.0% in 2021 (-0.1%). Average inflation expectations for 2019 have fallen by 1.5% points over three years – from 6.0% when surveyed for the first time in the first quarter of 2017 to 4.5% currently,” states the BER.
The results of the BER survey is reportedly one of many factors the MPC considers in its interest rate decision.
The forecast of GDP growth for 2019 has been revised lower to 0.4% (from 0.5%).
The forecasts for 2020 & 2021 have decreased to 1.2% (from 1.4%) and 1.6% (from 1.7%), respectively, due to lower growth than previously expected in Q 3 & 4.
The GDP forecast for 2022 is 1.9%.
Since the November MPC meeting, the rand has appreciated 2.6% vs the US dollar and 1.8% versus the euro.
While the rand has benefited from improvements in global sentiment, high long term bond yields reflect concerns about domestic growth prospects.
Governor Lesetja Kganyago said implementation of prudent macroeconomic policies and structural reforms that lower costs & increase investment, potential growth and job creation remains urgent.
The decision may have come as a surprise to some.
Economist Mike Schüssler tweeted: “That was unexpected good news. small piece of good news but good nonetheless.”
All but three of the 24 economists Reuters surveyed last week expected the repo rate to be held at 6.5%. Of 19 economists surveyed by Bloomberg, only three forecast a 25 basis-point reduction, with the rest foreseeing the benchmark rate unchanged.
— Schalk Louw | Mr Louwcal
We’re a nation of borrowers so today’s 0,25% reduction in interest rates will be mostly welcomed. Let’s just hope that the already undervalued ZAR holds firm, especially if we should be downgraded to junk sometime in 2020.
— Michael Jordaan (@MichaelJordaan) January 16, 2020
Samuel Seeff, chairman of Seeff Property welcomed the MPC’s decision which will reduce the mortgage rate to 9.75% (from 10%). However, he said more is needed.
“The Reserve Bank’s stance has been too conservative over the last year at the expense of the economy and property market. Consequently, it missed at least two, possibly three opportunities to cut the rate given that inflation has remained well within the target range for most of last year while the currency remained reasonably stable, and in fact improved.
“The sentiment boost of a rate cut should not be underestimated. South Africa’s interest rate is higher relative to the rest of the world and out of step with the economy which is struggling while consumer and investor confidence is at record-low levels. We have been in a holding pattern for about 18 months and it is time for decisive action from the Reserve Bank to take responsibility and provide support for the economy.
“We need to see at least a further 50-100 basis points cut from the interest rate during the first half of 2020 to restore confidence and provide vital impetus for the economy.”
With limited, modest growth anticipated for the year ahead (2020), Dr Andrew Golding, CEO of the Pam Golding Property said the decision is encouraging, particularly given the heightened uncertainty ahead of the 2020 Budget speech and likely downgrade of SA’s credit rating to junk status by Moody’s in March.
“House price inflation was fairly muted last year (2.7% Jan-Nov 2019 according to the Pam Golding Residential Property Index), but transaction volumes showed some growth during the course of last year. It is unlikely we will see a sustained recovery in the residential market until the economy enters a decisive growth phase, however, in the meantime we expect the consolidation in the market to continue – supported by the willingness of financial institutions to lend, renewed demand following price correction and a steady increase in first-time buyers. We anticipate that while house price inflation this year may be stronger than last year, it is unlikely to significantly exceed the prevailing inflation rate, so anticipate another year of consolidation, with pockets of strength.”