Repo rate stable at 6.5%
Category Services
The SA Reserve Bank's Monetary Policy Committee (MPC) announced on November 21 that the repo rate will remain unchanged at 6.5%, with the prime lending rate stable at 10%. Three of the five committee members voted to keep the repo rate on hold, while the other two members voted to cut the rate by 25 basis points.
During the announcement, SARB Governor, Lesetja Kganyago, said: "Monetary policy actions will continue to focus on anchoring inflation expectations near the mid-point of the inflation target range in the interest of balanced and sustainable growth. In this persistently uncertain environment, future policy decisions will continue to be highly data-dependent, sensitive to the balance of risks to the outlook, and will seek to look through temporary price shocks.
"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 the third quarter GDP outcome is expected to be weak."
Inflation
Kganyago said the medium-term inflation outlook remains largely unchanged since the MPC's meeting in September. Headline consumer price index (CPI) inflation is expected to peak at 5.3% in the first quarter of 2020, and to settle at 4.5% in the last quarter of 2021.
Although the overall risks to the inflation outlook are assessed to be balanced, uncertainty about inflation risks are unusually high. 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.
Business confidence remains weak and the risk of further capital flow has increased, which could put further pressure on the exchange rate.
Global markets
Kganyago said that barring significant shocks, monetary policy in major economies are expected to remain accommodative in the medium term. The risk of renewed market volatility however, remains high.
Growth forecast
The SARB's forecast for 2019 overall growth was lowered from 0.6% to 0.5%, in line with the Treasury's forecast. And the risks to the growth forecast are assessed to be to the downside.
Kganyago said that public sector financing needs have risen, raising the prospect of further pressure on the currency and pushing borrowing costs for the broader economy higher.
He said that if South Africa is to bring down the long term cost of capital, it must bring down the risk premium.
"Implementation of prudent macroeconomic policies and structural reforms that lower costs and increase investment, potential growth and job creation, remains urgent," said Kganyago.
"The MPC welcomes the moderation in inflation, and a 25 basis point reduction in the repo rate is projected for the third quarter of 2020."
Property market
In the currently low CPI inflation environment, a number of analysts expected the SARB to cut interest rates by 25 basis points at its MPC meeting this week, which would have lowered the repo rate to 6.25% and the prime lending rate to 9.75%.
"If this cut had taken place, however, we believe it unlikely that it would have materially changed the gradually correcting trend in the property market," said FNB Property Sector Strategist John Loos.
"We believe that current property market-related sentiment is driven less by interest rate moves and prospects at present and more by economic performance and perceived future economic growth and stability prospects."
Author: Sarah-Jane Meyer
