Johannesburg - The Reserve Bank yesterday cut its growth expectations to 0 percent from 0.6 percent signalling that the economy had stagnated as prospects dampened further since its monetary policy committee (MPC) meeting in May.
The bank revised its real growth domestic product (GDP) growth further downwards yesterday, with the economy now expected to expand by a lacklustre 1.1 percent and 1.5 percent only next year and 2018 respectively.
The bank kept its benchmark repo rate unchanged saying that while it was still concerned about inflation, the weak economy provided some room to delay further policy tightening.
“The MPC is aware that some of the… factors that contributed to this decision could reverse quickly, and remains ready to react appropriately to any significant change in the inflation outlook,” governor Lesetja Kganyago told a news conference.
Nedbank said the MPC still assessed the risks to the growth outlook to be on the downside due to heightened global uncertainty.
Surprises
The rand extended gains against the dollar following the decision, while government bonds also strengthened.
The Reserve Bank said the medium-term inflation trajectory would remain outside its 3 percent to 6 percent target band until the second half of next year.
But it said there had been some improvements in the near-term prospects following successive downside surprises.
The outlook for Africa’s most industrialised economy remained extremely challenging, following a 1.2 percent contraction in the first quarter of this year, it added.
The Reserve Bank had previously warned that South Africa, which dodged credit rating downgrades from Moody’s, Fitch and S&P Global Ratings earlier, still faced the risk of cuts if the ailing economy showed no improvement.
Peter Attard Montalto, an emerging market analyst at Nomura International, said: “What was not made clear (though it was hinted at tangentially) – but we still believe – is that the MPC believes that, given the medium-run upside inflation risks, it must hike rates to neutral of around 7.5 percent. It is in no rush to reach this point, however.
“The language of the press conference and statement was that the cycle was not over and that the hiking cycle is still ongoing, given rates are still in accommodative territory.”
He said Nomura now saw a strong likelihood that the currency would weaken further as political risks and ratings downgrades were delivered through year-end.
He added that higher inflation expectations, wage-growth increases and sticky inflation in the first half of next year would mean that risks to rates entering tight territory would remain high.
Sanisha Packirisamy, an economist at Momentum Investments and Savings, said internationally, expectations of further interest rate hikes had been pushed back as the market interpreted the Brexit outcome as growth negative, instead looking for further monetary support by global central banks.
She said the increased expectation of interest rates on a global scale to remain lower for longer in response to the lack of clarity regarding the Brexit process going forward had led to a recovery of the rand in recent weeks.
“Even though a sharp increase in non-resident inflows into the equity market in particular has been observed in June and July to date, the MPC cautioned against possible changes in US monetary policy expectations and the possibility of a ratings downgrade later this year.”
* With additional reporting by Reuters
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