The South Africa Reserve Bank surprisingly lowered its key interest rate on Thursday to 6.75 percent from 7 percent. However, the decision was not unanimous as only four out of six council members voted for the cut. Following the SARB’s decision, the USD/ZAR pair rose moderately to just above 13.
Also, the central bank revised down its inflation and growth projections as expected. It voiced major worries about the weak growth momentum and expects average growth rates of just 0.5 percent and 1.2 percent for 2017 and 2018, respectively. The SARB believes that downside risks predominate as it “is unclear where the drivers of accelerated growth will come from in the absence of credible structural policy initiatives”.
The central bank projects average inflation rates of 5.4 percent for this year and 4.9 percent for next. 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.
Moreover, the South African rand continues to be a risk factor. The SARB highlighted that it was willing to offset any deterioration of the inflation outlook and hike the key rate again if required.
“If investors remain optimistic about the emerging markets and if the inflation outlook does not deteriorate, rates might be cut again. This outlook will probably weigh on the rand”, noted Commerzbank in a research report.
