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Sarb cuts key interest rate, damps expectations for more

Sarb shifts policy to help boost the economy.

South Africa’s central bank shifted policy to help boost the economy and now the government must do its part to make the first interest-rate cut in more than a year more effective.

That was the message from the Reserve Bank’s Monetary Policy Committee after agreeing to lower the repurchase rate to 6.5% from 6.75%. It was the first time since the central bank starting giving the breakdown of the vote in 2016 that the panel was unanimous in deciding to change policy. All but four of the 22 economists in a Bloomberg survey predicted a cut.

Read: Sarb cuts rates as economy weak, inflation steady

“For our 25 basis points to have a significant impact, this must be complimented by other structural reforms that deal with these underlying issues in the economy,” Deputy Governor-designate Fundi Tshazibana told reporters in Pretoria. “If you just take the impact of monetary policy alone, it will have a temporary effect that will fizzle out over time if it’s not complimented.”

The adjustment may give a fillip to consumers and an economy that contracted the most in a decade in the first quarter. While the central bank said the country probably avoided a recession given an expected rebound in the three months through June, it lowered its growth forecast for the year to just 0.6%.

Rand movements

Addressing lawmakers shortly after the MPC decision, President Cyril Ramaphosa, who has defended the Reserve Bank from criticism by ruling party and labour union officials, said the government hopes “much more will happen from the central bank.”

The first-quarter GDP contraction, and inflation at the middle of the 3%-to-6% target range, had stoked calls from the African National Congress and its labor allies for an expansion of the Reserve Bank mandate to focus more on economic growth and job creation, and for a cut in its key interest rate to help boost output.

Thursday’s move could be the last one for this year, however, unless the economic growth outlook deteriorates more and inflation expectations drop. The decision brought forward the 25-basis point cut that was already in the central’s quarterly projection model and the MPC didn’t discuss a 50 basis-point reduction, Governor Lesetja Kganyago said.

Forward-rate agreements climbed after the comments, as investors moved to price in less chances of cuts for the rest of the year.

“While there is a strong argument from a cyclical perspective to cut further, South Africa’s litany of structural problems means that the extent to which they can ease has a floor – in our view at between 50 and 75 basis points overall,” Peter Kent, co-head of fixed income at Investec Asset Management, said in an emailed note. “More than that would require a meaningful improvement in the structural impediments to growth.”

© 2019 Bloomberg L.P.

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Oh, wow! A whole 25 basis points! You’re too good for us! Especially considering the economy is shrinking, the differential between Prime and the inflation rate is far higher than in EU countries and even developing nations, and massive unemployment. The rand has also consistently performed better than the gloomy SARB predictions over the past few years.

Thanks for nothing.

Unfortunately this will do little to mitigate the increase in fuel, rates, electricity and food prices. Consumer spending will remain strained and the economy will remain weak.

So what’s TymeBank doing now – dropping their rate (on savings) too? They’re very quiet…

The rate reduction will have a minimal effect on economic growth, our economy is in a systemic decline (BEE , ANC etc) and a lower interest rate will not lead to more investment.
We have a largely consumption driven economy and the interest rate might free up some money to improve the spending, but manufacturing will not benefit.
As a counter effect those who spend, based on their investments will spend less.
Probably a nett zero sum.
Economic growth will/can only come if the obstacles to investment and producing “stuff” are seriously addressed i.e. BEE, ANC, communist style economic thinking etc.

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