The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) announced a 25 basis point (bps) cut to the Repo rate on the 18th of July. It was important to note that the decision was unanimous and that a 50bps cut was not discussed at all. The repo rate which was at 6.75% is now set at 6.50%, much to the relief of consumers in South Africa (SA). The reserve bank governor, Lesetja Kganyago painted a very neutral macro-economic picture, which gave the MPC the room to cut without reservations.

Globally, the governor spoke about escalating geopolitical tensions, which the market has become more accustomed to over the last year. He mentioned that despite trade tensions, global growth remains fairly healthy but also stated that the MPC views market expectations of large global central bank interest rate cuts as aggressive and overly optimistic.

The local fundamentals as viewed by the MPC remain subdued and growth extremely disappointing. The Headline inflation outlook as per the Quarterly Projection Model (QPM) was changed to 4.4% for 2019 from 4.5% in the previous meeting and 5.1% and 4.5% for 2020 and 2021 respectively. Core inflation was also moved down to 4.4% for 2019 from 4.5% prior, and 4.7% for 2020 and 4.5% for 2021. Oil forecasts were down from $69/bbl to $67/bbl for 2019 and unchanged at $68/bbl for 2020 and 2021. The Rand implied starting point was moved down from R14.40: USD to R14.30: USD, given the rand strength since the last meeting. The QPM views the Rand as undervalued at current levels. The most important adjustment was the move of GDP forecasts from 1% to 0.6% for 2019 and unchanged at 1.8% for 2020 and 2% for 2021.
The QPM model moved from penciling in an interest rate cut in Q1 of 2020 to a cut in Q4 of 2019. The MPC decided to bring this cut forward by making the move now. This removes the high expectations for another cut locally but also leaves room if they need to cut. The neutral tone allows for several scenarios to play out. If the Federal Reserve System (FED) in the United States (US) cuts more aggressively, the MPC will have room to respond. On the other hand, if the cuts are moderate, the MPC has allowed for low expectations from markets and no response will be needed.

The biggest risk flagged by the MPC was the funding of State-Owned Entities (SOEs) and potential bailouts from the government. There was a plea for the governor and other members of the MPC to the government to assist monetary policy with much needed structural reforms and policy certainty in order to shift the country’s potential growth. Monetary policy cannot do much on its own, and cyclical policies will not change the structural issues in the economy.

The MPC has two vacancies, and the governor mentioned that these seats will be filled in due course. The potential path of interest rates will be largely data-driven and the next MPC announcement is set for September 19th, 2019.

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