Weak South Africa Growth May Allow for Lower Rates, Central Bank Says

  • Weak South Africa Growth May Allow for Lower Rates, Central Bank Says

South Africa’s weak economic growth may provide some scope for lower interest rates, the central bank said.

“With near-zero growth and a negative output gap, there is some limited scope for lower interest rates to have positive counter-cyclical effects,” the South African Reserve Bank said in its Monetary Policy Review Wednesday.

The central bank left its key rate unchanged at 6.75 percent on Sept. 22 as it assessed risks to the rand and inflation outweighed weak growth prospects. While not ruling out further easing, the bank said it will be guided by data and economic developments — including the possibility of further credit-rating downgrades and a faster pace of policy tightening in the U.S. and Europe, both of which would pose dangers to the rand.

The Reserve Bank cut rates in July for the first time in five years after the economy had slipped into a recession. Growth prospects remain bleak, with the central bank forecasting 0.6 percent expansion this year and 1.2 percent in 2018, with risks to the forecasts “slightly to the downside.”

The bank expects inflation to remain within the target band of 3 percent and 6 percent until at least the end of 2019 while price growth will average 5.3 percent this year, decelerating to 5 percent in 2018.

Negative Shocks

“The improvement in inflation has been repeatedly jeopardized by negative domestic shocks, such as downgrades by the ratings agencies as well as the Public Protector’s proposed amendment to the bank’s constitutional mandate,” the central bank said. “Both inflation and inflation expectations have stayed well above the midpoint of the target range — even as global inflation rates have settled at historically low levels.”

South Africa’s anti-graft ombudsman, Public Protector Busisiwe Mkhwebane, instructed the legislature in a June 19 report to change the constitution to make the Reserve Bank focus on the “socioeconomic well-being of the citizens” rather than inflation. Her comments caused the rand to slide as the change was seen by investors as a threat to the lender’s independence. A court overturned her instruction after the central bank challenged it.

The Revenue Service told lawmakers in September that tax revenue in the fiscal first quarter that ended June 30 was 13 billion rand ($956 million) behind target. The government will provide more information in October, when Gigaba delivers his first medium-term budget policy statement.

Should tax revenue continue to fall short of estimates, it would be more than 40 billion rand, or 4 percent, below the forecast in the February budget, the central bank said. The budget gap would therefore widen to about 4.5 percent of gross domestic product compared with the February budget’s goal of 3.5 percent, it said.

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years experience as a foreign exchange research analyst and trader.

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