Interest rates left unchanged despite the Reserve Bank's gloomier growth forecasts for 2020

As expected, the SA Reserve Bank's monetary policy committee left the repo rate unchanged at 6.5%. The prime rate will remain 10.25%

The announcement was made by the central bank's governor Lesetja Kganyago at a media briefing in Pretoria on Thursday afternoon. The decision was unanimous, Kganyago said.

The repo rate is the benchmark interest rate at which the Reserve Bank lends money to other banks. In July, the Reserve Bank cut the rate by 25 basis points to 6.5%. That was the first rate cut in more than a year.

The MPC on Thursday decided to leave interest rates unchanged despite clear concerns about economic growth.

Kganyago noted that while growth rebounded in the second quarter, longer-term weakness in most sectors remain a serious concern. He expects "muted" third-quarter growth as business confidence declines further.

The Reserve Bank's  forecast for GDP growth for 2019 remains unchanged at 0.6%. But the central bank's forecasts for 2020 and 2021 have been lowered to 1.5% (from 1.8%) and 1.8% (from 2.0%).

In reference to Treasury's new discussion paper on economic growth, Kgangayo said he is glad that government is finally talking about structural reforms in the economy. The finance minister released the economic strategy blueprint for public comment in late August. 

Inflation

The MPC is closely watching South Africa's consumer inflation number which rose by 4.3% in August, up from in 4% in July. August's increase was slightly higher than expected due to food price growth, which reached its highest level in 18 months.

Kganyago on Thursday warned of continued upside risks to the inflation outlook, in particular from fuel, electricity and water prices.

The petrol price was on track to be lowered in the first week of October - until Saturday's drone and missile attack on Saudi Arabian oil facilities resulted in a record jump in the oil price. According to the latest estimates, the petrol price will now be hiked by at least 2c a litre.

Kganyago said the question of how quickly production can be restored is key. "Our approach is this is a once-off shock." If it changes the outlook for long-term fuel prices, the MPC will adjust its forecasts, he said. 

"The MPC welcomes the sustained moderation in inflation outcomes and the fall in inflation expectations of about one percent since 2016. The Committee would like to see inflation expectations also anchored closer to the mid-point of the inflation target range on a sustained basis."

Decision was expected 

Mamello Matikinca-Ngwenya, FNB's chief economist, said the decision to leave the repo rate unchanged was expected.  "We, however, are of the view that there is room to reduce the repo rate further. Globally, monetary policy remains accommodative and domestically growth and inflation remain low." 

She noted that in the US the Federal Reserve reduced interest rates on Wednesday and expectations are for further easing. "European central banks, among others, have reduced rates below the zero bound into negative to boost economic growth and inflation. This has provided room for other emerging market central banks to ease their policy rates.”

But in his comments, Kganyago said that while the US cut rates in an effort to generate inflation, South Africa doesn't have a low inflation problem. 

Junk threat

Asked about the threat of a Moody's downgrade in November, Kganyago said that the central bank will wait to see what the impact will be on the currency and inflation. It could be that the downgrade is already priced into the market. "At the moment none of us can definitively say whether the thing is priced in or not." 

The outlook for the rand is a complex matter, Kganyago said. In the past, the currency was driven by rate changes by the Reserve Bank. Now there are many more moving parts and the currency is more responsive to capital flows (the rate at which foreigners buy or sell local shares and bonds.)

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