Reserve Bank cuts repo rate by 25 basis points

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has decided to reduce the repo rate by 25 basis points, with effect from 30 May.

This reduces the prime lending rate from banks to 10.75 %.

Five members favoured this action, while one preferred a cut of 50 basis points.

“Looking forward, we have revised down our inflation forecasts. This reflects the lower starting point, as well as a stronger exchange rate assumption and lower world oil prices.

“These factors offset pressure on fuel costs from the higher fuel levy announced in the Budget. In addition, our previous forecast included VAT increases, which have since been cancelled,” SARB Governor Lesetja Kganyago said on Thursday, while delivering the Monetary Policy Committee statement.

The inflation was below 3% again in April. The undershoot of the target mainly reflects falling fuel costs, but underlying inflation is also well contained. Core inflation came in at 3%, at the bottom of SARB target range.

“Now that inflation has slowed, we have a chance to lock in lower inflation at low cost. This scenario illustrates that opportunity,” Kganyago said.

While the inflation outlook appears benign, the MPC considered an adverse scenario, which illustrates the upside risks.

“This was based on a global slowdown, triggered by escalating trade tensions, where the rand depreciates sharply. The scenario showed how a country with some fundamental vulnerabilities, like South Africa, risks stagflation, with growth moving lower while inflation rises due to currency weakness. In these conditions, monetary policy tightens to stabilise the macroeconomy.

“The threat of rand depreciation that we warned of at our last meeting, given both global and domestic factors, manifested last month, with the currency briefly touching a multi-year low against the US dollar. However, the exchange rate has since recovered, and conditions seem more settled than they did in March, even if the global environment remains uncertain,” he said.

The Gross Domestic Product (GDP) projections were trimmed and the growth was currently expected at 1.2% this year, rising to 1.8% by 2027.

“The global environment remains difficult, which makes domestic reform critical for achieving healthy growth. The SARB’s main contribution is to deliver price stability, and we see scope to lock in low inflation and clear the way for sustainably lower interest rates.

“Additional measures that would improve economic conditions include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains,” Kganyago said.