Reserve Bank paints bleak picture of South Africa's Growth Prospects

A much-improved inflation outlook prompted the Reserve Bank to cut interest rates for the first time in five years on Thursday, but it painted a bleak picture of growth prospects, saying the cut would help only "at the margins".

The Bank also warned that the environment was highly uncertain and it would not hesitate to reverse its rate-cut decision should the inflation outlook deteriorate again.

The 25-basis-point cut surprised the market because few had expected the Bank to cut so soon. Many economists had argued that lower inflation over the next couple of years created the space for cuts in 2017 or early in 2018.

Many had expected the Bank to be cautious in the face of political risks to the rand that could derail inflation.

 

 

Also, the Bank had been expected to be wary of being seen to cave into political pressure to prioritise growth over inflation, after the public protector’s controversial recommendation to eliminate its price stability mandate.
However, Bank governor Lesetja Kganyago said on Thursday that the Bank felt no threat to its independence, nor was it concerned about its credibility. "We have earned our credibility and will protect it because we have a constitutional duty to protect the value of the currency in the interests of balanced and sustainable growth," he said, emphasising the Bank’s independence was one of the original constitutional principles adopted in 1993.

The rand weakened as much as 1.2% after the decision and pared its losses to trade 0.3% lower at 13.05/$ by 7 pm in Johannesburg on Thursday. Yields on rand-denominated government bonds due in December 2026 fell 10-basis point to 8.54%, the lowest since June 26. The currency is vulnerable to political uncertainty and possible further credit-rating downgrades, Kganyago said.
The Bank is pressing ahead with its court challenge to the public protector’s report, even though she has now said she would not defend her recommendation on the mandate.
The monetary policy committee’s decision came after what the Bank’s head of research, Rashad Cassim, described on Thursday as an "intense discussion".
Four of the six members of the committee favoured the 25-basis-point rate cut, which came as the Bank cut its average inflation forecast 0.4percentage points for 2017 and 2018 and 0.3percentage points for 2019 – and at the same time slashed its growth forecast to just 0.5% for 2017, edging up to 1.2% in 2018 and 1.5% in 2019.

The committee said it was unclear where the drivers of accelerated growth would come from "in the absence of credible structural policy initiatives that will reduce uncertainty and increase business and consumer confidence" and warned that growth could come in even lower than its forecast.

Lower international oil prices and a slightly stronger rand are expected to underpin lower inflation, as are more subdued food price inflation and the weak state of the economy itself, while the latest better-than-expected inflation numbers have provided a lower base for the forecasts.

The Bank now sees inflation coming down to average 5.3% in 2017, 4.9% in 2018 and 5.2% in 2019, with core inflation now in the high 4% range where previously the Bank had forecast it at more than 5%.

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