The South African Reserve Bank’s Monteary Policy Committee 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 an unanimous vote, said SARB governor Lesetja Kganyago.
A rate drop was widely expected by the market, with economists noting that there was enough room for a cut, adding that the move would help reignite some activity in the market, and starting a series of cuts that economists forecast could total as much as 75 basis points over six months, Bloomberg reported.
That would support a fragile recovery in sales and consumer confidence by loosening the cost of debt.
In his address on the MPC outcomes, Kganyago was frank about the many problems still facing the country, despite some stabilisation in inflation, which is in the middle of the 3% to 6% range, and the rand/dollar exchange rate.
The Reserve Bank governor 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 also hit by household consumption and employment growth.
However, based on recent short term indicators for the mining and manufacturing sectors, a rebound in GDP is expected in the second quarter of 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, the overall risks to the inflation outlook are assessed to be 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,” Kganyago said.
Food, electricity and water prices also remain important risks to the inflation outlook, he said.
The MPC’s forecasting model had previously factored in one cut of 25 basis points before the end of 2019, and Kganyago said that it now could broadly move in any direction from meeting to meeting, based on any new developments and changing risks.