At its latest meeting, held on 16-18 July, the Monetary Policy Committee of the South African Reserve Bank (SARB) unanimously decided to cut the repo rate from 6.75% to 6.5% (a cut of 25 basis points).News of the easing in monetary policy, which was widely expected by economists, led to an appreciation of the rand.The last time the rate was slashed was in March 2018.
A statement issued by Lesetja Kganyago, the Governor of the South African Reserve Bank, speaking on behalf of the Monetary Policy Committee, said:
“Since the May meeting of the Monetary Policy Committee (MPC), near-term indicators point to weaker-than-anticipated global economic activity.”
In the first quarter of the year, South Africa’s GDP fell significantly, contracting 3.2%.This was due to a number of factors, notably widespread strikes and electricity shortages related to Eskom, the troubled public utility provider.
These shortages and strikes had knock-on effects throughout the wider economy.Nevertheless, other indicators, such as manufacturing output, point to a rebound in GDP for the second quarter.
In its report, the South African Reserve Bank also cut its 2019 GDP growth forecast to 0.6%, which represented a notable downgrade.
Its previous forecast, which was released last May, anticipated growth of 1.0% for the year.The Bank left its 2020 and 2021 forecasts for South Africa, Africa’s second-largest economy, unchanged (at 1.8% and 2.0%).
Furthermore, the report noted that although “inflation expectations have continued to moderate,” and “risks to the inflation outlook are… largely balanced,” upside risks to the inflation outlook could have a large impact.
The South African economy faces multiple headwinds, which was reflected in the somewhat downbeat tone of the Central Bank’s report.
These headwinds include a soaring unemployment rate, uncertainty around President Cyril Ramaphosa’s raft of reforms, and sour sentiment among foreign investors.
The Monetary Policy Committee’s report also pointed out that despite an easing in global financial conditions, there are clear downside risks to the outlook.
These notably include global geopolitical risks, high levels of private and public debt, and trade tensions spurred on by U.S.