SARB'S MPC CUTS REPO RATE

Category Interest Rates

The SA Reserve Bank's Monetary Policy Committee (MPC) has decided to reduce the repo rate by 25 basis points to 6.25% from 6.5% - a unanimous decision.

Inflation

Headline CPI inflation is expected to peak at 4.9% in the final quarter (Q4) of 2020 and settle at 4.5% in the third quarter of 2021 (one quarter earlier).

The forecast for core inflation for 2019 is unchanged at 4.2%, is 4.3% in 2020 (down from 4.5%) and 4.4% in 2021 (down from 4.6%). The Bank's forecast for core inflation for 2022 is 4.5%.

In a statement sent after the bank's decision, the Bureau for Economic Research's (BER's) Inflation Expectations Survey 19Q4 revealed that in Q4 2019, average inflation expectations for 2019, 2020 and 2022 declined further.

"Analysts, business people and trade union representatives on average expect headline inflation to be 4.5% in 2019 (0.1% point lower than previously), 4.8% in 2020 (-0.2% points) and 5.0% in 2021 (-0.1%). Average inflation expectations for 2019 have fallen by 1.5% points over three years - from 6.0% when surveyed for the first time in the first quarter of 2017 to 4.5% currently," states the BER.

The results of the BER survey is reportedly one of many factors the MPC considers in its interest rate decision.

Growth

The forecast of GDP growth for 2019 has been revised lower to 0.4% (from 0.5%).

The forecasts for 2020 & 2021 have decreased to 1.2% (from 1.4%) and 1.6% (from 1.7%), respectively, due to lower growth than previously expected in Q 3 & 4.

The GDP forecast for 2022 is 1.9%.

Rand

Since the November MPC meeting, the rand has appreciated 2.6% vs the US  dollar and 1.8% versus the euro.

While the rand has benefited from improvements in global sentiment, high long term bond yields reflect concerns about domestic growth prospects.

Governor Lesetja Kganyago said implementation of prudent macroeconomic policies and structural reforms that lower costs & increase investment, potential growth and job creation remains urgent.

Industry comment

The decision may have come as a surprise to some.

Economist Mike Schüssler tweeted: "That was unexpected good news. small piece of good news but good nonetheless."

All but three of the 24 economists Reuters surveyed last week expected the repo rate to be held at 6.5%. Of 19 economists surveyed by Bloomberg, only three forecast a 25 basis-point reduction, with the rest foreseeing the benchmark rate unchanged.

Author: MoneyWeb