Interest rate surprise: SARB cuts rates for first time since mid-2012
SARB revises down expectation for 2017 headline inflation to 5.3% from 5.7% previously
Since the last meeting of the central bank’s Monetary Policy Committee (MPC) in May, the inflation outlook has improved on the back of a deceleration in food price inflation, muted domestic demand conditions and a decline in international oil prices. Furthermore, in spite of exchange rate volatility, the rand has remained comparatively resilient. As a result, the MPC lowered interest rates by 25 basis points in its July meeting, cutting the repo and prime rate to 6.75% and 10.25%, respectively.
Inflation outlook revised downward
Statistics South Africa (StatsSA) reported in July that headline inflation decreased to 5.1% year-on-year, from 5.4% y-o-y in May. This was the lowest annual inflation result since November 2015.
As a result, Lesetja Kganyago, Governor of the South African Reserve Bank (SARB), noted the Bank’s forecast for headline CPI inflation has been revised down by 0.4 percentage points in 2017 and 2018 to 5.3% and 4.9%, respectively.
Source: StatsSA and SARB, July 2017
Furthermore, household consumption expenditure contracted in the first quarter of 2017, amid a deterioration in consumer confidence. After the FNB/BER Consumer Confidence Index (CCI) increased to -5 in 2017Q1 from -10 in 2016Q4, the index fell back to -9 in the second quarter of 2017. This marks the longest streak of consumer pessimism since the survey started in 1982.
Exchange rate resilience supports MPC decision to lower interest rates
Comparative rand resilience in recent weeks was supported by a narrowing of the current account deficit and positive investor sentiment towards emerging markets. Nonetheless, Governor Kganyago emphasised the rand remains vulnerable to heightened political uncertainty, monetary policy developments in developed markets and possible further downgrades of South Africa’s credit ratings.
Depressed economic situation a concern for SARB
Despite the improvement in the inflation outlook, Governor Kganyago noted the MPC was concerned about South Africa’s growth performance:
“Underlying demand in the economy is extremely weak and the MPC is concerned about the deterioration in the growth outlook over the forecast period. This decline is broad-based.”
He noted credible structural policy initiatives were required to drive accelerated growth that would reduce uncertainty and increase business and consumer confidence.
Risks to the inflation outlook remain: outlook for September
South Africa’s tepid growth performance in tandem with softer food price inflation and a resilient exchange rate prompted the MPC’s decision to cut interest rates by 25 basis points in July. The market expected the MPC would likely keep rates unchanged, with only 3 out of 23 economists surveyed by Bloomberg predicting the MPC would lower interest rates in July. Looking forward, the SARB will likely remain cautious about further monetary policy loosening and consider whether the outlook for inflation will remain comfortably within the target range in coming months.
For more information:
- Too early for lower interest rates?
- Global developments could dominate SARB’s interest rate trajectory
- MPC may have room to keep interest rates on hold
- Inflation declines in August as petrol price decreases
- Continued hold on the SARB’s interest rate hiking cycle?
- 4 reasons why the SARB kept the interest rate unchanged in July