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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:

MauraMaura Feddersen
Financial Risk Management, KPMG South Africa
M +27 (0)82 719 3812



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Maura Feddersen

About Maura Feddersen

Maura is an Economist in Financial Risk Management at KPMG Services South Africa. She has a Master of Commerce in Economics specialising in macroeconomics and South African development. Maura develops economic tools to help organisations position themselves optimally in view of continuous shifts in their economic and regulatory environment. She currently works on macroeconomic modelling and forecasting as part of the implementation and validation of banking accounting standard IFRS 9. Maura also runs the KPMG Interest Rate Survey and provides regular commentary on global and domestic economic developments. She specialises in econometric analysis and behavioural economics.

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