Reserve Bank keeps interest rates unchanged amid global risks

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has decided to leave the repo rate unchanged at 7.50%.

In his address following the MPC’s two days of deliberation, SARB Governor, Lesetja Kganyago, said looming global risks could not be ignored in determining inflation risk going forward. 

This largely expected move comes on the back of three successive 0.25 percentage point cuts.

Although the flat month-on-month consumer price index figure of 3.2% for February had been seen by many economists as potentially good news for interest rates, the MPC took a cautious approach given the risks that lie ahead.

"The world economy is experiencing extreme levels of uncertainty. Trade tensions have escalated, and longstanding geopolitical relationships are shifting abruptly. In these circumstances, the global economic outlook is unpredictable," Governor Kganyago said.

Given the disruptive effects of tariffs and policy uncertainty, growth expectations have slipped and inflation in advanced economies remains elevated. Given these risks, rates are likely to remain high for longer.

South Africa’s growth forecast has been revised downwards to 1.7% and while inflation is still in the bottom half of the Reserve Bank’s target range, it has edged higher over the past few months.

Kganyago said although the inflation forecast sees risks both on the upside and downside, the balance of risks in the medium term are skewed to the upside.

It was against this backdrop that the MPC elected to keep rates unchanged, with four members voting in that direction, versus two having favoured a 25 basis point cut.

“For several quarters we have enjoyed rising confidence in South Africa, with a smaller country risk premium and lower bond yields. However, the global economy is not on a stable footing and there are also domestic uncertainties, which put these favourable trends at risk. This calls for a cautious policy approach,” Kganyago said.

In the US, the Federal Reserve left rates unchanged this week for the second time in a row due to economic uncertainty and higher inflation.

Investec chief economist, Annabel Bishop, said in a note ahead of the announcement was the central bank was expected to leave rates unchanged as “it remains concerned over the high degree of uncertainty around the global outlook and still sees risks to domestic inflation to the upside”.

Old Mutual chief economist, Johann Els, said ahead of the announcement that the MPC had space to cut rates, and the vote was likely to be a split among members.

“The Reserve Bank’s January cut was undertaken amid significant warnings about global risks, including uncertainties around US trade policies and higher inflation. However, since then, many of these risks have materialised, yet the rand remains as stable as it was in January,” Els said.

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