PRETORIA – Reserve bank unexpectedly cut its benchmark lending rate for the first time in five years on Thursday, citing weak growth and easing inflation, and denied any pressure from recent political attacks on its mandate.
South Africa’s main anti-graft watchdog recommended last month that the Reserve bank mandate be changed to place more focus on growth and not just inflation and protecting the value of the currency, the rand.
Reserve bank governor Lesetja Kganyago, who has launched legal proceedings to counter the watchdog’s challenge, said the Reserve bank remained independent and had not come under any pressure to cut rates.
He said the regulator eased rates due to weak growth and an improved inflation outlook but said monetary policy alone would not be enough to spur an economy languishing in recession.
“No President past or present, no Minister of Finance past or present has ever attempted to tell the SARB how to go about implementing its mandate,” he said. “We are not under any political pressure.”
The 25 basis points cut to 6.75 percent was the first reduction in lending rates since July 2012 and ran counter to market consensus that rates would be held steady.
The rand fell more than one percent after the decision, before recovering some of its losses to trade 0.5 percent weaker, while government bonds rose more than 10 basis points.
The bank also halved its 2017 growth forecast to 0.5 percent, and trimmed next year’s projection to 1.2 percent.
The recession in Africa’s most developed economy is adding to pressure on President Jacob Zuma, who is also handling fallout from credit downgrades and massive corruption scandals that have further dented investor confidence.
Inflation Within Target
Kganyago however warned that a dismal growth outlook compounded by political and policy uncertainty and the risk of a credit downgrade of the country’s rand-denominated debt rating would limit the effects of monetary policy.
“We are very clear that we did this in the environment that we are in, to try and provide some support (to the economy). We could only do this because we are now confident that inflation is well within our target,” he said.
First National Bank chief economist, Sizwe Nxedlana, said the Reserve bank’s decision underlines less concern about long-term inflation.
“The 25 basis point cut is unlikely to have a material impact on economic growth, but will provide modest relief for embattled consumers,” Nxedlana said.
South African inflation slowed more than expected to 5.1 percent year-on-year in June, data showed on Wednesday. The Reserve bank has an inflation target range of 3 to 6 percent.
Standard Charted Bank Chief Economist for Africa, Razia Khan, said the fundamentals favoured a cut.
“It is precisely because the SARB’s credibility is so well-established that they could cut today,” she said.
“The only odd part of this was that the SARB did not really signal this in any meaningful way ahead of the move.”