(Bloomberg) -- South Africa’s central bank kept interest rates on hold in a split decision, with two of the six policymakers favoring a cut which could signal a shift toward easing as soon as September.
The monetary policy committee left its benchmark interest rate unchanged at a 15-year high of 8.25% for a seventh consecutive meeting, Governor Lesetja Kganyago said in a virtual press conference Thursday.
He said the two MPC officials who favored a cut wanted to lower rates by 25 basis points while the other four wanted to keep rates on hold. “Members agreed that restrictive policy remains appropriate to stabilise inflation at 4.5%,” he said. Who voted for what is not publicly disclosed by the South African Reserve Bank.
Although the unchanged stance was in line with the median estimate of 23 economists in a Bloomberg survey, it was the first time this year that economists disagreed on what the South African Reserve Bank’s decision would be, with some expecting a cut.
“Alongside two MPC members voting for a cut at today’s meeting, we now expect the SARB to embark on an easing cycle at its next meeting in September with a 25 basis points cut to 8%,” David Omojomolo at Capital Economics wrote in a note to clients.
The central bank’s next policy decision will be announced on Sept. 19, one day after the Federal Reserve is widely expected to commence its own easing campaign. While Kganyago has repeatedly said the SARB doesn’t follow the Fed, he acknowledged that recent rand strength improves the outlook for South African inflation.
The rand traded slightly stronger at 18.190 per dollar by 4:42 p.m. in Johannesburg. Yields on benchmark government debt were flat, with bonds due in 2035 largely unchanged at 11%.
What Bloomberg Economics Says...
“We expect inflation at 4.5% to see the SARB deliver a first rate cut of 25 basis points at its November meeting — that means one more rate hold at it next gathering in September. This will be followed by cuts amounting to 50-bps in the first half of 2024 and then a pause at 7.5%.”
— Yvonne Mhango, Africa Economist
Forward-rate agreements, used to speculate on borrowing costs, are fully pricing in a 25 basis-point cut in September, with a 60% chance of a 50 basis-point reduction.
“With inflation still at 5.2%, too high still for Governor Kganyago’s liking — he described it as being at the ‘upper end of the range’ — we think this vote split is nonetheless a significant dovish development.” said Razia Khan, chief economist for Standard Chartered Bank. “This in our view was the clearest evidence yet of the SARB’s willingness to consider future rate easing.”
The central bank has been resolute in its job to quash inflation and vowed not to loosen policy until consumer prices recoiled back to the 4.5% midpoint of its target range where it prefers to anchor expectations.
The latest inflation expectations survey show average expectations at 5% next year and 4.9% two years ahead.
“Inflation expectations do not yet reflect the 4.5% midpoint objective over the medium term,” Kganyago said. “While expectations are moving in the right direction, they continue to show the impact of the recent inflation surge.”
Kganyago declined to be drawn on whether the conditions were ripe to adjust policy when the central bank meets in September. But he did draw attention to the decline in its inflation forecast, which sees consumer prices heading to 4.3% in the fourth quarter and staying around that level through the first half of 2025.
“We need to have continuous readings of inflation that shows a downward trajectory,” he said. “But more importantly, that the expectations of the price setters becomes aligned with the midpoint of the inflation target range, and with the forecast which the SARB has.”
--With assistance from Paul Richardson, Ana Monteiro, Colleen Goko and Prinesha Naidoo.
©2024 Bloomberg L.P.
