SOUTH African Reserve Bank governor Lesetja Kganyago. Thobile Mathonsi African News Agency (ANA)
JOHANNESBURG - South African Reserve Bank (Sarb) Governor Lesetja Kganyago announced today the bank's latest decision on interest rates following the three-day meeting of the monetary policy committee (MPC) which he chairs.

Kganyago said, " The MPC unanimously decided to reduce the repurchase rate by 25 basis points to 6.5% per annum." 

Kganyago said during his statement, " GDP contracted by 3.2% in the first quarter, reflecting weakness in most sectors of the economy. The sharp quarterly decline was primarily caused by electricity shortages and strikes that fed into broader weaknesses in investment, household consumption and employment growth."

He further added, "Headline CPI inflation is expected to peak at 5.4% in the first quarter of 2020 and settle at 4.5% in the last two quarters of 2021.The forecast for core inflation is lower at 4.4% in 2019 (down from 4.5%), 4.7% in 2020 (down from 4.8%) and is unchanged at 4.5% in 2021. Headline CPI inflation is expected to peak at 5.4% in the first quarter of 2020 and settle at 4.5% in the last two quarters of 2021."

Kganyago said, "The implied path of policy rates generated by the Quarterly Projection Model was for one cut of 25 basis points to the repo rate by the end of fourth quarter of 2019. The endogenous interest rate path is built into the growth and inflation forecast. The implied path remains a broad policy guide which could change in either direction from meeting to meeting in response to new developments and changing risks."

Ahead of the announcement the MPC was widely expected to cut interest rates by at least 25 basis points for the first time since March 2018 on weak economic growth, subdued inflation and the dovish global monetary climate.

Inflation rose to 4.5 percent in May from 4.4 percent in the prior month, but still in the mid-point of the Sarb’s target range of 3 to 6 percent. Bank of America Merrill Lynch said its researchers had pencilled in the 25 basis point cut to be followed by two cuts in September and January. 

“The rand stands to benefit disproportionately from risk-in emerging markets (EMs). Real 10-year yields based on core inflation is 5 percent, the highest since 2011 and substantially above many major EM peers,” Merrill Lynch said. 

Yesterday, retail sales in South Africa increased 2.2percent year-on-year in May following an upswing of 2.7percent the previous month, raising hopes that the much-anticipated expected interest cut today would provide a further boost to embattled households’ bottom lines.

Data from Statistics South Africa (StatsSA) yesterday showed that household furniture, appliances and equipment, pharmaceuticals and medical goods, as well as cosmetics and toiletries, and food, beverages and tobacco pushed up sales during the period.

Jacques Nel, an analyst at NKC Africa Economics, said the 25-basis point cut had become more than a reality.

“However, a rate cut of such magnitude is unlikely to have a notable effect on consumer spending, given dismal confidence levels,” Nel said.