The South African central bank cut its main lending rate by 25 basis points to 6.5%, as expected, citing weak economic growth and inflation which has stayed around the midpoint of its target range.
The last time the South African Reserve Bank (Sarb) cut its repo rate was in March 2018.
The Sarb is one of many central banks under pressure to ease monetary policy as fears over domestic and global growth have intensified.
“The MPC welcomes the continued downward trend in recent inflation outcomes and the moderation in inflation expectations of about one percentage point since 2016,” Sarb Governor Lesetja Kganyago told a news conference.
Kganyago said the overall risks to the inflation outlook were assessed to be largely balanced and that economic growth was expected to rebound in the second quarter after a sharp 3.2% contraction in the first quarter.
The rand strengthened to R13.94 at 15:22, following the announcement.
Lukman Otunuga, research analyst at FXTM, says buying sentiment towards the rand jumped in the afternoon with the local currency gaining 0.5% against the dollar. “The USD/ZAR could challenge 13.84 if 13.90 proves to be an unreliable support.”
He says that market optimism from lower interest rates stimulating consumption, which remains a key engine of growth, is likely to boost appetite for the rand.
Thursday’s rate decision was unanimous.
Twenty-four of 30 economists polled by Reuters expected the rate to be lowered to 6.50%. Two expected a cut of 50 basis points and the other four said rates would be left unchanged.
The Steel and Engineering Industries Federation of Southern Africa (Seifsa) welcomed the decision in a statement and said it has the potential to stimulate local consumer demand and revive the stuttering economy.
Businesses that continue to operate in a tough economic environment characterised by low domestic growth and subdued demand have received some relief, said Seifsa’s chief economist Michael Ade.
David Morobe, GM for Impact Investment at Business Partners, explains that a cut in interest rates will likely have a positive effect on consumers’ spending behaviours.
“Consumers will likely have a bit more disposable income to spend on services and products, which businesses should capitalise on.”
Earlier this year a faction in the African National Congress (ANC) pushed for the Sarb’s mandate to be broadened to explicitly include boosting economic growth and job creation, as well as price stability.
Another faction aligned with President Cyril Ramaphosa said no such plans were being considered, but it was enough to rattle markets.
Kganyago, recently re-appointed to a second five year-term, is a staunch defender of the bank’s independence.
Peter Kent, the co-head of fixed income at Investec Asset Management, says the interest rate cut is in line with its long-held view that the South African economy is experiencing sustained disinflation, which is mostly driven by the lack of demand in the economy.
Kent adds that the Sarb has to now maintain a careful balance in the months ahead.
Samuel Seeff, chairman of the Seeff Property Group, says the bank should have been bolder and opted for a 50bps cut. “At a time when the economy and property market are really struggling, we needed courage.
“A bolder rate cut is already factored into the currency and the Reserve Bank should have done more to inject impetus to support President Ramaphosa’s reforms to get the economy and confidence back on an upward trajectory.”