Central bank cuts benchmark repurchase rate as expected

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JOHANNESBURG, March 28 – South Africa’s Reserve Bank cut its benchmark repurchase rate, at which it lends to commercial banks, by 25 basis points as expected on Wednesday, saying the risks to the inflation outlook had subsided.

The reduction will offer some relief for South African households bracing for a one percentage point increase in value-added tax from April 1.

“While the increase in the value-added tax rate to 15 percent places temporary upside pressure on inflation, this is mitigated by the stronger exchange rate which has contributed to the changing inflation risk profile,” Governor Lesetja Kganyago told a news conference, announcing a reduction in the repo to 6.5 percent from 6.75 percent.

This means commercial banks will also cut their lending rates to consumers by 25 basis points.

Kganyago said headline inflation, which the central bank targets within a 3-6 percent band, was expected to average 4.9 percent in 2018, unchanged from the previous forecast, 5.2 percent in 2019 (down from 5.4 percent), and 5.1 percent in 2020.

The economic growth outlook was more positive but still challenging, with expansion in the fourth quarter of 2017 surprising significantly on the upside, and there are signs of increased business confidence.

Economists had predicted the rate cut, citing in part a stronger rand against the dollar in the aftermath of Cyril Ramaphosa, a former businessman liked by markets, being sworn in as president to replace Jacob Zuma.

Kganyago noted that the rand had appreciated by 4.8 percent since the previous meeting of the central bank’s monetary policy committee in January.

The currency, however, retreated a bit on Wednesday after he said it was “somewhat overvalued”, and was trading at 11.77 to the dollar from 11.73 when Kganyago began his speech.

The interest rate cut comes a few days after Moody’s Investor Service affirmed South Africa’s sovereign rating as ‘investment grade’ and changed the outlook from negative to stable.

“The rand has reacted positively to domestic political developments in the past months and was given further support following the recent sovereign credit rating announcement,” Kganyago said.

He said the central bank now expected the economy to grow by 1.7 percent in 2018 compared with its earlier prediction of 1.4 percent. Africa’s most industrialised economy expanded by 1.3 percent in 2017.

Future policy decisions would be highly data-dependent and sensitive to the assessment of the balance of risks to the inflation outlook, Kganyago said.

– African News Agency (ANA)