SARB holds key rate; paints gloomier outlook

By Amogelang Mbatha and Ntando Thukwana

(Bloomberg) – The South African Reserve Bank held its key interest rate at a two-year low as the economy struggles through a recession and policy makers warned that investor sentiment toward emerging markets is a risk to the currency and that inflation pressures are mounting.

The Monetary Policy Committee voted to hold the repurchase rate at 6.5 percent Thursday. Three of the MPC’s seven members votes to increase the rate by 25 basis points, a deviation from the July and May decisions, which were unanimous for holds.

The logo of the South African Reserve Bank.

The central bank has had to walk a tightrope – balancing its goal of anchoring price growth close to the 4.5 percent midpoint of its target amid higher oil costs with the needs of a shrinking economy. The rand has lost 14 percent against the dollar this year as global trade wars and turmoil in other emerging markets fueled a sell-off in assets, complicating the bank’s task.

“The MPC assesses the risks to the inflation outlook to be on the upside,” Governor Lesetja Kganyago told reporters in the capital, Pretoria. The price-growth trajectory is moving further away from the target band’s midpoint, he said, adding that the implied path of policy rates generated by the bank’s quarterly projection model is for five increases of 25 basis points by the end of 2020.

Second-round effects

The economy is weak and inflation is likely to remain within the bank’s target range, said Johannes Khosa, an economist at Nedbank Group Ltd. in Johannesburg.

“They will continue to talk tough but we don’t believe they will act immediately,” he said by phone. “They will wait for the second-round effects of inflation.”While the central bank warned that currency weakness continues to pose a risk to inflation expectations, annual price growth decelerated from a 10-month high in July to 4.9 percent in August, remaining firmly in the bank’s target band of 3 percent to 6 percent.

Brazilian officials held the key rate at 6.5 percent Wednesday, while central banks in Russia and Turkey raised their benchmarks to support their currencies. The Federal Reserve may announce its third interest-rate increase for the year next week, which could lessen the appeal of some emerging-market assets.