Photographer: Nadine Hutton/Bloomberg

South Africa Presses ‘Pause Button’ in Rate-Increase Cycle

Updated on
  • Economy to expand zero percent this year, 1.1 percent in 2017
  • Central bank leaves benchmark interest rate unchanged at 7%

South Africa’s Reserve Bank left interest rates unchanged as it forecast the economy won’t expand this year.

The central bank left the benchmark repurchase rate unchanged at 7 percent for a second consecutive meeting, Governor Lesetja Kganyago told reporters on Thursday in the capital, Pretoria. That was in line with the forecasts of all 25 economists in a Bloomberg survey.

“We have pressed the pause button on the hiking cycle,” Kganyago said. Economists, including Investments Solutions’ Lesiba Mothata and Ian Scott from PSG Asset Management, had said the central bank’s raising cycle had probably come to an end.

The Monetary Policy Committee has raised the key rate by 125 basis points since last July to 7 percent to steer price growth back toward its 3 percent to 6 percent target band even as the economic outlook deteriorated due to weak export demand, the worst drought in more than a century, low commodity prices, and most recently, the U.K.’s vote to quit the EU. The effect of Brexit on South Africa’s growth and trade prospects is still uncertain, the MPC said.

The central bank cut its growth forecast for the year to zero percent from 0.6 percent, even as it doesn’t expect the economy to fall into recession, Kganyago said. The forecast for next year was cut to 1.1 percent from 1.3 percent and the projection for 2018 was lowered to 1.5 percent from 1.7 percent. While the first quarter’s annualized contraction of 1.2 percent had a big impact on the MPC’s growth outlook, it is expected to have been the low point in the cycle, Kganyago said.

“The broad-based strengthening of the rand coupled with weak domestic growth,
downside risks to global growth and domestic inflation that is likely to moderate in 2017 has significantly reduced the scope for the SARB to hike rates further,” Sizwe Nxedlana, chief economist at Johannesburg-based First National Bank, said in an e-mailed note.

While the rand’s 26 percent slump against the dollar last year and the drought have boosted food costs and kept inflation above 6 percent since the start of the year, the currency’s gains in 2016 have helped to limit price growth. Inflation quickened for the first time in four months in June, to 6.3 percent.

Inflation will probably peak at 7.1 percent in the fourth quarter of this year and will only return to the target in the third quarter of 2017, Kganyago said. The Reserve Bank lowered it average price-growth forecast for 2016 to 6.6 percent from 6.7 percent. Inflation is projected to average 6 percent next year and 5.5 percent in 2018, he said.

“It almost appears as if they have to maintain a cautious bias because of inflation being outside of target for a protracted period but at the same time they are doing the best they can to be growth accommodative,” Manisha Morar, an economist at ETM Analytics in Johannesburg, said by phone. “As we enter into 2017, we could start to see the markets pricing for prospects of a rate cut.”

The rand strengthened 0.9 percent to 14.2133 per dollar by 4:35 p.m. in Johannesburg, taking its gain for the year to 8.7 percent. Yields on rand-denominated government bonds due December 2026 fell four basis points to 8.75 percent.

The central bank can hold off on increasing borrowing costs “unless core inflation or inflation expectations rise,” the IMF said this month. “The impact of past policy hikes is still filtering through, and the weak economy should keep inflation contained.”