In the first quarter of 2017 South Africa’s economy slipped into its first recession in eight years as key industries struggled to sustain growth.
The South African Reserve Bank (Sarb) has cut its headline interest rate and lowered its growth forecasts amid a worsening economic outlook.
Only three of 23 economists in a Bloomberg survey forecast a cut.
The Bank’s latest monetary policy meeting took place in a highly politicised environment, after South Africa’s public protector last month recommended that the central bank mandate be changed to place more focus on growth and not just inflation and protecting the value of the rand.
Kganyago has warned that should the rand face further risk or the inflation outlook deteriorates, the bank will act swiftly to reverse its decision to cut the repo rate.
“The rand has also been affected by [changing European Central Bank and U.S. monetary policy expectations] as well as by domestic political developments, including concerns about a proposal to change the SARB’s monetary policy mandate”.
Slow growth, failure to improve governance at state-owned companies and a shock cabinet shuffle saw two ratings companies downgrade South Africa’s foreign debt to junk in April.
The lender has asked the courts to review and set aside the instruction, and the ombudsman isn’t challenging the application.
“Consumers could use some positive news right now and this downward shift, albeit only a quarter of a percent, is important, as it sends a positive signal to the market and hopefully heralds the start of a downward shift in the interest rate cycle”.
Twenty-four of 27 economists polled by Reuters had forecast the bank would hold rates at 7.00 percent. It mentioned that the core rate points to a weak underlying price trend but pointed to several upside risks, such as multi-year wage agreements due this year and the planned, considerable hike in administered electricity prices next year.