(Bloomberg) -- The South African Reserve Bank sounded moderately confident on the outlook for inflation and economic growth amid expectations for another quarter-point interest rate cut this year.
“Policy is still moderately restrictive,” the central bank said in its semi-annual Monetary Policy Review published Tuesday in Johannesburg. “While disinflation is on track, uncertainty remains.” Keeping with the tone of the report titled “The Clearing Storm.”
Policymakers cut rates by 25 basis points last month to 8% and now forecast inflation will hold in the bottom half of their 3%–6% target band over the next three quarters.
The review noted market pricing implied another quarter-point rate cut this year and it did not push back on this assessment.
“This is a noticeable shift in expectations since the previous MPR, but not out of line with changes in South Africa’s macroeconomic outlook,” it said.
The monetary policy committee will meet once more this year and deliver its decision on Nov. 21.
Softer oil prices and a stronger rand, boosted by positive sentiment fueled by South Africa’s formation of a business-friendly governing coalition after its May 29 election, has helped ease price pressures.
Stronger Rand
“South Africa’s inflation has softened in the past two months and the outlook has improved markedly,” the central bank said. “The rand appreciation has added impetus to the disinflation process, which had, until now, been driven by a moderately restrictive monetary policy stance.”
Still, it cautioned that risks to the outlook remain, including uncertainty over how far and how fast global financial conditions will ease as other central banks including the Federal Reserve and European Central Bank cut borrowing costs.
“What seems likely, however, is that easing cycles this time will be shorter and shallower than in previous episodes, leaving rates higher than they were before the pandemic,” the reserve bank said.
Other Highlights
- Policy decisions will continue to be guided by incoming data as the MPC seeks to protect the purchasing power of the rand in the interest of balanced and sustainable economic growth, the central bank said.
- While inflation expectations are above the 4.5% midpoint of the central bank’s target range, where it prefers to anchor them, it still sees grounds for optimism. “In particular, improved anchoring is suggested by the clustering of two-years-ahead expectations of business survey respondents,” closer to the midpoint, it said.
- On fiscal policy the central bank said revenue and spending trends raise the prospect of a primary surplus in 2024-25. The boost in revenue is mostly from the drawdown of the Gold and Foreign Exchange Contingency Reserve Account, the review noted.
- Actions that can support stronger output growth include achieving a prudent public debt level and progress on structural reforms.
(Updates with more details from ninth paragraph.)
©2024 Bloomberg L.P.