Reserve Bank leaves rates unchanged

The South African Reserve Bank’s Monetary Policy Committee has voted to leave the country’s repo rate unchanged at 6.5%.

The meeting was the last sitting for 2019, with the next rate review scheduled for 16 January 2020.

According to Reserve Bank governor Lesetja Kganyago, while the general economic outlook in South Africa appears to be balanced, the bank still assesses risks to the downside over the medium term.

In particular, uncertainty around inflation remains high, he said.

“Food price inflation has continued to surprise to the downside, but rising imported food prices and uncertain domestic weather patterns raise uncertainty about the future price trajectory. Further upside risks to the inflation outlook include wage growth and fuel, electricity and water prices.”

The risk of further capital flow volatility has also increased, which could put pressure on the exchange rate, the governor said.

Since the September MPC, the rand has depreciated slightly by 0.6% against the US dollar, and by 0.8% against the euro. The implied starting point for the rand is R14.94 against the US dollar, compared with R14.88 at the time of the previous meeting.

“While the rand has benefited from improvements in global sentiment, investors remain concerned about domestic growth prospects and fiscal risks,” Kganyago said.

“Although GDP growth rebounded to 3.1% in the second quarter, longer term weakness in most sectors remains a serious concern.”

Based on recent short term economic indicators for the mining and manufacturing sectors, the third quarter GDP outcome is expected to be weak. Public sector investment has declined, export growth remains low, whereas government and household consumption continue to grow, albeit modestly.

Business confidence remains weak. The forecast of GDP growth for 2019 is revised lower at 0.5% (from 0.6%). The forecasts for 2020 and 2021 have decreased to 1.4% (from 1.5%) and 1.7% (from 1.8%), respectively, due to lower growth than previously expected in the third and fourth quarters and downward revisions to global growth.

“The MPC assesses the risks to the growth forecast to be to the downside. Escalation in global trade tensions, geo-political risks, further domestic supply constraints and/or sustained higher oil prices could generate headwinds to growth.

“Public sector financing needs have risen, raising the prospect of further pressure on the currency and pushing borrowing costs for the broader economy higher,” Kganyago said.

The governor stressed that the implementation of prudent macroeconomic policies and structural reforms that lower costs and increase investment, potential growth and job creation, remains urgent.

The implied path of policy rates over the forecast period generated by the Quarterly Projection Model indicated one repo cut of 25 basis points only in the third quarter of 2020.


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Reserve Bank leaves rates unchanged