South Africa cuts rates but strikes cautious tone

PRETORIA: South Africa's central bank cut its main lending rate as expected on Thursday, but it struck a cautious tone that suggested future cuts in borrowing costs were not a foregone conclusion despite benign inflation.

The South African Reserve Bank (SARB) is one of many central banks under pressure to ease monetary policy as fears about domestic and global growth intensify.

Africa's most industrialised economy contracted by 3.2% in the first quarter, a major setback for President Cyril Ramaphosa's efforts to rebuild investor confidence.

The SARB cut rates by 25 basis points to 6.5% in a unanimous decision which marked its first easing step since March 2018.

The rand gained and the benchmark 2026 government bond strengthened after the decision was announced.

"The monetary policy committee welcomes the continued downward trend in recent inflation outcomes and the moderation in inflation expectations of about one percentage point since 2016," SARB Governor Lesetja Kganyago told a news conference.

"However, the impact of upside risks to the inflation outlook could be significant," he added, citing shifts in global market sentiment, bailouts of state firms and utility price rises among potential risks.

The SARB lowered its growth forecast for 2019 to 0.6% from the 1.0% forecast at its last monetary policy meeting in May.

The bank kept its inflation forecasts broadly steady, with price increases of 4.4% and 5.1% seen this year and next, within its 3% to 6% target range.

"We are more or less where we want to be," Deputy Governor Rashad Cassim told reporters, suggesting the bank wasn't embarking on a cutting cycle just yet.

Kganyago said market expectations of future central bank actions appeared high, "creating the risk of significant market volatility should these not materialise".

DATA DEPENDENT

Earlier this year a faction in the governing African National Congress (ANC) party pushed for the SARB's mandate to be broadened to explicitly include boosting economic growth and job creation alongside price stability.

Another faction aligned with Ramaphosa said no such plans were afoot, but it was enough to rattle financial markets.

Kganyago, recently reappointed to a second five year-term, is a staunch defender of the bank's independence.

The SARB has stressed that its interest rate changes are data-dependent, and it repeated that mantra on Thursday.

"The committee remains of the view that current challenges facing the economy are primarily structural in nature and cannot be resolved by monetary policy alone," it said, adding that it assessed the rand to be slightly undervalued.

Other central banks from the United States to China have been grappling with cooling growth, partly because of the fallout from the trade war between the world's two largest economies.

South African consumers will welcome Thursday's rate cut, as they have been squeezed by successive fuel price rises and tax increases.

Ramaphosa has staked his reputation on reviving the economy but has been hampered by severe fiscal constraints as well as infighting in the ANC.

Twenty-four of 30 economists polled by Reuters had predicted the 25 basis point rate cut.