Kganyago says model shows may be room for rate cuts

The South African Reserve Bank’s forecasting model suggests there might be room for interest rate cuts in the next year or two, given how weak the economy is, Governor Lesetja Kganyago said.

While the central bank can play a role to help economic growth, decisions should be supported by other policies and structural reforms, Kganyago said in a copy of a speech posted on the Reserve Bank’s website.

Read: Sarb says it is committed to price stability mandate

The central bank’s inflation-targeting mandate drew renewed criticism from political parties and labour unions last week after news that the economy contracted the most in a decade in the first quarter. The ruling African National Congress’s secretary-general, Ace Magashule, said the party had decided the mandate must be expanded to include growth and job creation — later denied by leading ANC officials.

“To make a marked impact on potential output and employment levels, what is required is the implementation of prudent macroeconomic policies underpinned by credible structural policy initiatives,” Kganyago said. “Tough times call for tough actions. Monetary policy is not a substitute for structural reform.”

The central bank left its key interest rate at 6.75% last month. Two of the five MPC members favoured a cut, marking the first time in more than a year that anyone on the panel was in favour of lower rates. The quarterly projection model currently prices in one 25 basis point cut by the first quarter of 2020, while forward-rate agreements foresee a more than 80% chance of a quarter-point cut next month.

The central bank remains committed to its primary mandate of price stability in the “interest of balanced and sustainable growth,” Kganyago said.

Inflation slowed to 4.4% in April and the Reserve Bank’s model indicates price growth will be close to the 4.5% midpoint of the target band over the next few years, “which is where we want it,” he said. “If you want lower rates, you need lower inflation.”

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Source: moneyweb.co.za