Rate-Cut Window May Have Closed for South Africa's Central Bank

  • Reserve Bank surprisingly left key rate unchanged Thursday
  • Domestic, global risks may prevent further cuts: BNP Paribas

With its surprise decision to leave rates on hold on Thursday, South Africa’s central bank may have shut its policy-easing window.

Forward-rate agreements, which had been pricing in a 25 basis-point reduction in the benchmark rate this year, now suggest the South African Reserve Bank will be forced to stay put as central banks around the world move toward tighter policy. The rate on contracts starting in three months jumped 19 basis points, moving to within 10 points from the benchmark Johannesburg Interbank Agreed Rate to predict a less-than-50-percent probability of such a move.

The central bank left its key rate unchanged at 6.75 percent, with a 50/50 split among voting members, as it assessed risks to the rand and inflation outweighed weak growth prospects. Twenty out of 24 economists in a Bloomberg survey had forecast a rate cut. Markets were caught by surprise too, with the rand gaining, bonds falling and stocks declining. 

While not ruling out further easing, the bank said it will be guided by data and economic developments -- including the possibility of further credit-rating downgrades and a faster pace of policy tightening in the U.S. and Europe, both of which would pose dangers to the rand. Fitch Ratings Ltd. and S&P Global Ratings cut South Africa’s foreign-currency rating to junk in April, while Moody’s Investors Service has a negative outlook on its Baa3 assessment, the lowest investment-grade level.

“The tone of the statement was broadly similar to what it communicated in July, though the committee is clearly very divided on how much room the bank has to ease,” Jeffrey Schultz, an economist at BNP Paribas in Johannesburg, said in an emailed note. “Our own view is that the SARB missed a window of opportunity to cut today given the risks, mostly domestic, on the horizon.”

The Reserve Bank cut rates in July for the first time in five years after South Africa’s economy had slipped into a recession. Growth prospects remain bleak, with the central bank forecasting 0.6 percent expansion this year and 1.2 percent in 2018, with risks to the forecasts “slightly to the downside.”

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