South Africa’s Monetary Policy
South Africa’s central bank left its benchmark interest rate unchanged at a record low, surprising economists who had expected a cut to help revive an economy battered by the coronavirus pandemic.
The South African Reserve Bank (SARB) held the repurchase rate at 3.5%, Governor Lesetja Kganyago said in a statement on Wednesday. All 19 economists surveyed by Bloomberg had predicted a 25 basis-point reduction.
Economic Challenges
The decision comes as the economy faces its worst crisis since the end of apartheid in 1994. The pandemic has pushed the jobless rate to a record high and caused the deepest contraction in a quarter century.
The SARB has cut the rate by 300 basis points since the start of 2020, but Kganyago said the bank was concerned that further reductions could fuel inflation and weaken the rand.
Inflationary Pressures
The bank’s main concern is that inflation could rise above the 3% to 6% target range. The consumer price index rose 4.6% in June from a year earlier, the fastest pace since October 2018.
The SARB also said it was worried that a weaker rand could push up the cost of imported goods and services, further stoking inflation.
The Rand’s Performance
The rand has weakened more than 10% against the dollar this year, making it the worst-performing major currency. It was trading 0.2% weaker at 16.6200 per dollar as of 2:45 p.m. in Johannesburg.
The SARB said it was also concerned about the potential impact of a weaker rand on the country’s current-account deficit, which widened to 4.3% of gross domestic product in the first quarter.
Growth Prospects
The SARB said it expects the economy to contract 7.2% this year, a deeper decline than the 6.1% contraction forecast in May. It also revised its 2021 growth forecast to 4.1% from 4.5%.
The bank said it would continue to monitor the economic situation and would adjust its policy stance if needed.
Government Stimulus
The government has announced a number of stimulus measures to help the economy, including a $2.3 billion package to support small businesses and a $1.2 billion package to help the tourism sector.
The government has also said it will provide additional funding to help the health sector cope with the pandemic.
Central Bank’s Outlook
The SARB said it expects the economy to recover in the second half of the year, but warned that the outlook remains uncertain.
The bank said it would continue to monitor the economic situation and would adjust its policy stance if needed.
Conclusion
South Africa’s central bank has left its benchmark interest rate unchanged at a record low, surprising economists who had expected a cut to help revive an economy battered by the coronavirus pandemic. The SARB has cut the rate by 300 basis points since the start of 2020, but is concerned that further reductions could fuel inflation and weaken the rand. The bank’s main concern is that inflation could rise above the 3% to 6% target range, and is also worried about the potential impact of a weaker rand on the country’s current-account deficit. The SARB said it expects the economy to recover in the second half of the year, but warned that the outlook remains uncertain. The government has announced a number of stimulus measures to help the economy, and the SARB said it would continue to monitor the economic situation and would adjust its policy stance if needed.