South Africa Reserve Bank Cuts Interest Rates

Cape Town – The monetary policy committee of the SA Reserve Bank has decided to cut interest rates by 25 basis points.

This means the repo rate is now 6.5% and the prime lending rate 10%.

The last time the central bank cut the repo rate was in July 2017, when the MPC reduced the rate by 25 basis points from 7% to 6.75%.

The repo rate is the benchmark interest rate at which the Reserve Bank lends money to commercial banks and the prime rate the rate at which commercial banks lend money to borrowers.

SARB governor Lesetja Kganyago, speaking in Pretoria on Wednesday after the conclusion of the three-day meeting of the bank's Monetary Policy Committee, said the MPC in a split decision decided to lower the repo rate.

At the committee's last meeting in January, it was decided to keep the rate unchanged at 6.75%. 

Kganyago said the inflation forecast of the bank has shown a moderate improvement. Indications are that a low point of the inflation cycle has been reached. The main changes in the forecast relate to the exchange rate, among others things, he said.

He cautioned that the SARB's 5-year inflation expectations have declined. He said the MPC would prefer its inflation expectation anchor closer to the mid-point of the target range of 3% to 6%.

Kganyago also cautioned that an international trade war could push inflation expectations higher.

He also said the rand has appreciated since the last MPC meeting. "At current levels the bank models see the rand as somewhat over-valued."

He aid the rand has reacted positively to recent political developments and the recent ratings announcement by Moody's. Further support for the rand has come from recent dollar weakness.

He listed as a key risk to the rand the possible fiscal tightening in the US.

The rand was trading softer at R11.76 to the US dollar immediately after the announcement.

Wichard Cilliers, head dealer at TreasuryONE, said the rand seems to have settled around R11.76 after the rates announcement.

The SARB, although feeling that the inflation cycle has reached the bottom during Q1 of 2018, has cautioned that a percentage point in the increase in VAT might add temporally upside pressure towards inflation.

The bank has improved South Africa's growth forecast for 2018 to 1.7% from 1.4% during January, mostly on the back of improved business and consumer confidence.