Reserve Bank keeps rates on hold but warns of myriad risks
Despite the decision MPC strikes a more hawkish tone
The 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, while inflation pressures are mounting.
The monetary policy committee voted to hold the repurchase rate at 6.5% on 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 Bank has had to walk a tightrope — balancing its goal of anchoring price growth close to the 4.5% midpoint of its target amid higher oil costs with the needs of a shrinking economy. The rand has lost 14% 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. 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.
The economy is weak and inflation is likely to remain within the bank’s target range, said Nedbank economist Johannes Khosa. “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% in August, remaining firmly in the bank’s target band of 3% to 6%.
Brazilian officials held the key rate at 6.5% 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.