Thu, 24 Sep 2020

Two months can be a long time in central banking, and if you are the South African Reserve Bank, it can mean bringing an interest rate cut forward and a move to signaling even more.

The Reserve Bank's monetary policy committee unexpectedly cut its key rate to 6.25% from 6.5% on Thursday, a move predicted by only three of the 19 economists surveyed by Bloomberg.

These charts show how the data that influenced the decision have changed since the November MPC meeting.

The Reserve Bank has made it clear it wants to anchor inflation expectations at the midpoint of its target range of 3% to 6% and this may be in reach now. While the MPC predicted in November that price growth would exceed 5% in 2020, it now sees the rate settling at the 4.5% mark from the third quarter of next year. The risks to the outlook are balanced, Governor Lesetja Kganyago said.

At the beginning of 2019, the Reserve Bank projected economic growth of 1.7% for the year. That has now been trimmed to just 0.4%. GDP growth hasn't exceeded 2% since 2013 and the MPC has now joined the National Treasury in forecasting that expansion won't get back to that level by 2022. The outlook for the economy is fragile and the risks to the estimates published on Thursday are on the downside, Kganyago said.

The three MPC members who voted to hold the rate in November changed their position and joined the other two panel members how favored a 25 basis-point cut. The Reserve Bank doesn't publish minutes of its meetings or disclose voting by each individual member.

In November, the Reserve Bank quarterly projection model priced in only one 25 basis-point cut in the third quarter of this year. Kganyago said at the time this could change in either direction. The updated implied path of policy rates over the forecast period indicated two cuts of 25 basis points each in the first and fourth quarters of 2020, Kganyago said on Thursday.

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