Reserve Bank cuts rates by 25 basis points after inflation outlook improves, but uncertainty reigns

The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) cut its key repo rate by 25 basis points on Thursday, citing an improving inflation outlook while pointedly noting that the spectre of uncertainty still haunts the global economic landscape. 

The move, effective from Friday, 30 May, takes the central bank's key repo rate to 7.25% and the prime lending rate to 10.75%, bringing further relief to consumers and businesses in a fragile economy that is barely growing but at least has the solace of broadly contained inflation.

Consumer inflation in March and April were below Sarb's mandated 3% to 6% target range and it sees an improved outlook on this front, giving it the scope it needed to wield the scalpel.

(Based on a 20-year repayment period at the prime rate.)

That may not seem like a lot, but multiplied by many bonds it provides a small shot of liquidity for an ailing economy - households can spend or save that money rather than pay it on their bond.

"The undershoot of the target mainly reflects falling fuel costs, but underlying inflation is also well contained. Looking forward, we have revised down our inflation forecasts," the MPC statement said. 

"This reflects the lower starting point, as well as a stronger exchange rate assumption and lower world oil prices. These factors offset pressure on fuel costs from the higher fuel levy announced in the Budget. In addition, our previous forecast included VAT increases, which have since been cancelled." 

In line with Treasury, IMF and other institutions, Sarb downgraded its forecast for South Africa's economic growth this year - a frequent feature of MPC statements which seldom upgrade the outlook on this withering front. 

"We have now trimmed our GDP projections, and currently expect growth of 1.2% this year, rising to 1.8% by 2027. The outlook for structural reforms remains positive, but there are also headwinds like lower global growth," it said.

The MPC was being typically cautious but not hawkish against the backdrop of the swirling clouds of uncertainty that have shrouded the global economy - a consequence of many factors, not the least of which are US President Donald Trump's chaotic tariff tiffs. 

After an international drama where countries around the world were slapped with ridiculously high tariffs, Reuters reported yesterday that a US trade court blocked President Donald Trump’s tariffs from going into effect in a sweeping ruling on Wednesday. The US trade court that found the president overstepped his authority by imposing across-the-board duties on imports from US trading partners.

The MPC sentiment was underscored by the fact that while most economists expected the move, it was hardly an overwhelming majority in the face of so much uncertainty. 

"Since our last meeting, global economic conditions have been volatile. Higher tariffs on imports into the United States have been announced, and then partly reversed," was the statement's understated lead.

The rand's recent performance was one of the stars of the show and that has partly been driven by the dollar's global depreciation triggered by Trump's blasting from the hip.

"The threat of rand depreciation that we warned of at our last meeting, given both global and domestic factors, manifested last month, with the currency briefly touching a multi-year low against the US dollar. However, the exchange rate has since recovered, and conditions seem more settled than they did in March, even if the global environment remains uncertain," the MPC statement said.

"Uncertain" and "uncertainty", while not terms of art, were the words of the day.  

During the Q&A that followed the reading of the statement and the rate decision, Governor Lesetja Kganyago said that he had been to five international conferences or meetings since April and they all had one overriding theme: uncertainty. 

"So I have come to the conclusion: the one thing that is certain is that uncertainty is here," Kganyago said. 

Uncertainty is certainly on the minds of many economists - that is for certain. 

"The impact of heightened uncertainty on investor confidence and capital flows will likely continue to drive gyrations in capital and currency markets - exacerbating external vulnerabilities and keeping the Sarb cautious," FNB chief economist Mamello Matikinca-Ngwenya said in a note on the MPC decision. 

Despite all of the uncertainty, this rate cut is not going to fan the flames of inflation and will perhaps provide a tiny spark to South Africa's woeful pace of economic growth. That much is at least fairly certain. 

Sarb may have had room for a bigger cut, but that artless word hangs in the air. DM