Tue, 26 May 2020

Interest rates left unchanged

19 Sep 2019, 23:43 GMT+10

As expected, the SA Reserve Bank's monetary policy committee left the repo rate unchanged at 6.5%. The prime rate will remain 10.25%

The announcement was made by the central bank's governor Lesetja Kganyago at a media briefing in Pretoria on Thursday afternoon. The decision was unanimous, Kganyago said.

The repo rate is the benchmark interest rate at which the Reserve Bank lends money to other banks. Changes in the repo rate affect the prime lending rate, which is the lowest rate at which banks start lending to clients.

In July, the Reserve Bank cut the repo rate by 25 basis points rate cut to 6.5%. That was the first rate cut in more than a year,

Kganyago noted that while growth rebounded in the second quarter of the GDP rebounded, longer-term weakness in most sectors remain a serious concern, and he expected "muted" third-quarter growth as business confidence declined further.

In reference to Treasury's new discussion paper on economic growth, Kgangayo said he is glad that government is finally talking about structural reforms in the economy,

The MPC is closely watching South Africa's consumer inflation number which rose by 4.3% in August, compared to 4% in July. August's increase was slightly higher than expected.

Annual food inflation reached its highest level in 18 months, registering 3.8% in August due to higher bread and maize meal prices.

Also, fuel prices could be adding to inflation pressures in coming months. The petrol price was on track to be lowered in the first week of October - until Saturday's drone and missile attack on Saudi Arabian oil facilities resulted in a record jump in the oil price. According to the latest estimates, the petrol price will now be hiked by 2c a litre.

Kganyago said following the attacks, how quickly production can be restored will be key. "Our approach is this a once-off shock." If it changes the outlook for long-term fuel prices, the MPC will adjust its forecasts.

Asked about South Africa's fiscal position and the threat of a Moody's downgrade in November, Kganyago said that the central bank will wait to see what the impact will be on the currency and inflation. It could be that the downgrade is already priced into the market. "At the moment none of us can definitively say whether the thing is priced in or not."

The outlook for the rand is a complex matter, Kganyago said. In the past, the currency was driven by rate changes by the Reserve Bank. Now there are many more moving parts and the currency is more responsive to capital flows (the rate at which foreigners buy or sell local shares and bonds.)

The US is cutting interest rates in an effort to generate inflation. "Our problem is not that we have low inflation."

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