Surprise cut in SA interest rates, rand hit

SA Reserve Bank governor Lesetja Kganyago.
SA Reserve Bank governor Lesetja Kganyago.

Cape Town - SA Reserve Bank governor Lesetja Kganyago announced on Thursday that the Monetary Policy Committee has decided to cut the interest rates.

"The MPC has decided to reduce the repurchase rate by 25 basis  points with effect from 21 July 2017, to 6.75% per annum," said Kganyago. "Four members preferred a reduction, while two members preferred an unchanged stance."

The repo rate is the interest rate at which the SARB lends money to commercial banks. The cost of borrowing is now 10.25%.

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16:17

READ: The full speech by SARB Governor Lesetja Kganyago


15:53

The rand took a knock on Thursday after the SA Reserve Bank surprised the market with a 25 basis point cut in interest rates.

The rand, which was trading on the front foot for most of the week, briefly lost some ground, moving back to R13.00/$ immediately after the rates cut announcement. By 15:50 it was trading at R13.04 to the greenback. Before the announcement the local unit was trading R12.97/$. It opened trading at R12.91.

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15:21

The rate cut, which was not anticipated, is the first change in more than a year.

Kganyago said it comes on the improved inflation outlook and the deteriorated growth outlook.

"The domestic growth outlook remains a concern", he said. The SARB also revised down economic growth for the country from 1% - 0.5% for this year.

Earlier on Thursday the European Central Bank also left interest rates unchanged. The rand was trading sideways at R12.97 to the US dollar.

Kganyago said the rand remains vulnerable to global monetary policy developments and credit ratings downgrades.

In South Africa a change in the interest rate is often made to keep inflation within the target band of 3% and 6%.

The lower inflation and recessionary conditions are expected to prompt monetary policy easing, according to analysts. However, they added that this is counteracted by the persistent currency risk linked to political uncertainty and the normalising of interest rates by the Federal Reserve Bank in the US.

Kganyago said at the last announcement that a reduction in rates would  be possible should inflation continue to surprise on the downside and the forecast over the policy horizon be sustainably within the target range.

"In this highly uncertain environment, future policy decisions will be dependent on data outcomes and our assessment of the  balance of risks," Kganyago said on Thursday.

"We remain vigilant and would not hesitate to reverse this decision should the inflation outlook and risks deteriorate," he cautioned.

Tough times

This month's SARB MPC announcement followed a tough month fighting off attacks on its mandate.

Public Protector Busisiwe Mkhwebane ordered Parliament to amend the Constitution to change the SARB’s mandate of inflation targeting to one that is more pro-growth.

Parliament wants Mkhwebane’s remedial action set aside.

The SARB is also challenging the remedial action, however the Office of the Public Protector indicated that it will not oppose the court application relating to the Reserve Bank's mandate.

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