BREAKING NEWS: Reserve Bank springs interest rate surprise, cuts for first time in 16 months

The Reserve Bank surprised markets with an interest rate cut on Thursday.

While most economists have been expecting the bank to move towards a cut, it was not expected to come quite so soon.

The Bank cut the repo rate to 6.75% from 7%.

Only three of the 23 economists surveyed by Bloomberg predicted the Bank would cut the repo rate, while the Trading Economics consensus was for it to remain at 7%.

Bank governor Lesetja Kganyago highlighted an improving inflation outlook and deteriorating growth — though there were risks to the inflation outlook, he said.

“Despite a degree of volatility, the rand exchange rate has been relatively resilient in the face of expected monetary policy tightening in some advanced economies, as well as domestic political risks and uncertainties. Risks to the inflation outlook still remain.

“The rand remains vulnerable to increased global risk aversion, domestic political shocks, and to the possibility of further ratings downgrades,” he said.

Kganyago outlined the following inflation forecasts:

• 2017: consumer inflation will average 5.3% (from the May forecast of 5.7%);• 2018: 4.9% (from 5.1% forecast in May); and• 2019: 5.2% (from 5.3% forecast in May).

He said inflation had peaked at 6.4% in the first quarter of 2017, in line with the Bank’s earlier projections.

“The main drivers of the improved forecast were the lower starting point; revised assumptions regarding international oil prices, domestic electricity tariffs and the real effective exchange rate; and a wider output gap.”

The outlook for economic growth, meanwhile, has worsened.

SA entered a technical recession in the first quarter of this year — a development that had not been expected.

The governor said: “At the same time, domestic growth prospects have deteriorated further following the surprise Gross domestic product (GDP) contraction in the first quarter of 2017.

“The economy has now recorded two successive quarters of negative growth, and although a near-term improvement is expected, the outlook remains challenging.”

GDP is now expected to grow 0.5% for 2017 (from the forecast of 1% at the May meeting); 1.2% in 2018 (from 1.5% expected in May); and 1.5% in 2019 (from 1.7% forecast in May).

The last rate increase was 25 basis points in March 2016‚ and followed a 50-point rise in January 2016.

Politicised environment

The Bank’s latest monetary policy meeting took place in a politicised environment, after Public Protector Busisiwe Mkhwebane picked a fight over its inflation-targeting mandate.

Kganyago is involved in a court battle over her recommendation, and has been blunt in his assessment of her recommendation, contained in her report on the Absa-Bankorp bail-out. He said in court papers last week that Mkhwebane had shown a fundamental lack of understanding of the monetary system and the role of central banks”.

But he stayed away from this controversy in his prepared remarks on Thursday.

Global outlook

There is a great deal of debate in major developed markets about when central banks will start pulling back the stimulus they instituted to jump-start their economies in the wake of the 20008-09 financial crisis.

Higher interest rates in developed markets affect SA by potentially weakening the rand, with implications for inflation.

The European Central Bank (ECB), which announced its decision to keep rates on hold on Thursday, was expected also to start preparing markets for a move to tighter monetary policy.

Views on when the US Federal Reserve will raise rates have fluctuated, as economic data releases offer conflicting views of the economy. Weaker US consumer inflation and retail sales late last week dented expectations of a cut in December.

The Bank of Japan, fighting a long battle to increase inflation left interest rates unchanged on Thursday.

In Africa, meanwhile, a recent Reuters poll pointed to the start of a protracted period of monetary easing across the continent.

SUNITA MENON AND TAMMY FOYN

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