South African Central Bank Surprises as It Holds Key Rate

  • Committee maintains benchmark interest rate at 6.75%
  • Decision expected by four of 24 economists in survey

The headquarters of the South African Reserve Bank in Pretoria, South Africa.

Photographer: Waldo Swiegers/Bloomberg

The South African Reserve Bank unexpectedly kept its benchmark lending rate unchanged because it’s concerned about higher inflation expectations. The rand rallied.

The central bank’s Monetary Policy Committee maintained the key repurchase rate at 6.75 percent Thursday. Only four of the 24 economists surveyed by Bloomberg had predicted the hold, while the rest expected a reduction.

“The MPC remains concerned that inflation expectations of business people and trade unions remain above or close to 6 percent for the next two years even though our own forecast and those of most analysts expect inflation to be much closer to 5 percent,” Governor Lesetja Kganyago told reporters Thursday in the capital, Pretoria.

The central bank lowered the key lending rate in July for the first time in five years as inflation moved back into its target band in April and the economy fell into its second recession in a decade in the first quarter of the year. While gross domestic product expanded in the three months though June, economic growth for the year is projected to be close to last year’s 0.3 percent.

Forward-rate agreements, used to speculate on borrowing costs, rose after the announcement. Contracts starting in three months, which on Wednesday still priced in 29 basis points of easing over the period, rose to show only 12 basis points of cutting is expected.

Half of the six MPC members favored the unchanged stance while the rest voted for a cut, Kganyago said.

“The key reason for what was clearly a close call seems to be the lingering risks that are potentially rand negative, and in turn inflationary,” Elna Moolman, an economist Macquarie Group in Johannesburg, said in an emailed note.

The bank expects inflation to remain within the target band of 3 percent and 6 percent until at least the end of 2019 while price growth will average 5.3 percent this year, decelerating to 5 percent in 2018.

South African Reserve Bank Governor Lesetja Kganyago announces the decision to keep the key rate unchanged.

Source: Bloomberg

S&P Global Ratings and Fitch Ratings Ltd. cut South Africa’s credit assessments to junk in April after President Jacob Zuma removed Pravin Gordhan as finance minister. That decision raised concern that National Treasury decisions would be become more political. The central bank has been under pressure after the nation’s anti-graft ombudsman instructed lawmakers in June to change the constitution to make the bank focus on the “socioeconomic well-being of the citizens” rather than inflation. The High Court has set this order aside.

“Their decision not to ease today, while it came as a surprise, I think highlights that the bank wants to tread carefully,” Jeffrey Schultz, an economist at BNP Paribas South Africa in Johannesburg, said by phone. “I certainly don’t believe that there is any political interference at the SARB and I think this decision makes it clear.”

Volatile Currency

The rand has been the most volatile of major and emerging-market currencies tracked by Bloomberg this year. The currency pared an earlier decline of as much a 0.6 percent to gain 0.4 percent to 13.2692 per dollar by 5:53 p.m. in Johannesburg on Thursday. Yields on rand-denominated government bonds due December 2026 rose 6 basis point to 8.46 percent.

South African stocks gave up their gains after the decision, with the benchmark index falling as much as 0.3 percent after rising 0.4 percent. Companies that benefit from rand weakness, banks and retailers were among the biggest contributors to the decline.

The currency remains a key risk to inflation, Kganyago said.

The rand is “sensitive to political developments, weak economic-growth prospects and the risk of further sovereign-ratings downgrades,” he said.

Africa’s most-industrialized economy expanded an annualized 2.5 percent in the second quarter. The MPC raised its growth forecast for 2017 to 0.6 percent from 0.5 percent, while keeping its 2018 forecast at 1.2 percent. The MPC sees the risks to these forecasts “to be slightly on the downside,” Kganyago said.

— With assistance by Simbarashe Gumbo, John Viljoen, and Colleen Goko

    Before it's here, it's on the Bloomberg Terminal.