Namibia cuts rate 3rd time to support weak economy

     Namibia's central bank cut its benchmark repo rate for the second time in less than a month and for the third time this year, saying this was to "support weak domestic activity and provide short-term relief amid the extraordinary circumstances arising from the Covid-19 pandemic."
      Bank of Namibia (BON) cut its rate by a further 100 basis points to 4.25 percent and has cut it by 225 points this year following cuts in February and on March 20.
      "At its new level, the repo rate will provide some short-term relief to borrowers," BON said.
     BON has been lowering its rate since August 2017 and has now cut it four times since then by a total of 275 basis points.
      BON, which pegs its Nambian dollar to South Africa's rand, said the rate cut would not compromise the one-to-one link between the currencies.
     On Tuesday the South African Reserve Bank (SARB) cut its policy rate for the second time in less than a month and for the third time this year as it upped its forecast for economic contraction in 2020.
     This year SARB has cut its repo rate by a total of 225 basis points to 4.25 percent.
     Namibia's economy and inflation slowed in the first quarter of this year while growth in private sector credit extension (PSCE) remains subdued, BON said, adding its stock of international reserves remain sufficient to protect the currency peg and meet international financial obligations.
     As of March 31, reserves rose to N$33.0 billion from N$32.2 billion on Feb. 29, enough for 5.3 months of imports.
     The slowdown in economic activity was mainly seen in the mining, wholesale and retail trade, manufacturing and tourism sectors, with tourist arrivals falling sharply. Transport and storage sectors, however, still showed positive growth.
     "Preliminary estimates indicate that the domestic economy will contract significantly in 2020," BON said, adding average growth in PSCE in the first two months rose 6.7 percent, but since the previous MPC meeting the annual growth declined further to 6.1 percent at the end of February from 7.2 percent in December 2019.
      In 2019 Nambia's economy shrank 1.1 percent due to severe drought and weak mining activity.
     Average inflation in the first three months of this year eased to 2.4 percent from 4.5 percent last year and is forecast to average below 3.0 percent in 2020, BON said.

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South Africa: prudent to maintain rate amid uncertainty

      South Africa's central bank left its benchmark repurchase rate at 6.75 percent, as expected, describing this decision as "prudent" during a time of a"high degree of uncertainty" and downside risks to economic growth and inflation.
       Although the South African Reserve Bank's (SARB) latest Quarterly Projection Model (QPM) implies an increase in the repo rate of 75 basis points by the end of 2019, Governor Lesetja Kganyago stressed the bank's monetary policy committee is not committed to such a rate path and its decisions may diverge from this path it as it weighs the risks and trade-offs from one meeting to the next.
       Despite a backdrop of favorable global growth, South Africa is facing the immediate risk that ratings agencies may downgrade it to sub-investment grade due to a a rapidly deteriorating fiscal position from low tax revenues, a negative reaction to the government's medium-term budget and speculation over free higher eduction.
       A ratings downgrade could to lead to sovereign bonds falling out of key emerging market indices, triggering "significant" sales of bonds by non-residents, and putting pressure on the exchange rate of the rand and long-term bond yields, boosting inflation and thus changing the likely path of monetary policy.
       Kganyago also said international oil prices were now of increasing concern, posing an upside risk to inflation along with the risk of a sizable increase in electricity tariffs by Eskom.
       He added stronger global growth is pushing up oil prices, which could boost global inflation and lead to a faster pace of monetary policy tightening in advanced economies, affecting capital flows to emerging markets, such as South Africa.
       In an update to its forecast, SARB kept its 2017 headline inflation outlook steady at 5.3 percent but raised the 2018 forecast slightly to 5.2 percent from a previous 5.1 percent and the 2019 forecast to 5.5 percent from 5.4 percent.
       The main upside stems from a weaker rand in 2018, higher oil prices and higher average wage growth that is offsetting favorable food prices.
       In 2016 the inflation rate was 6.3 percent and in October it eased to 4.8 percent from 5.1 percent.
       The forecast for the repo rate implies three hikes of 25 basis points each by the end of 2019, with the rate rising to 7.5 percent that year, up from the previous forecast of 7.1 percent.
      "The domestic growth outlook remains weak, continuing its deviation from the generally more favorable global pattern," Kganyago said.
      The economy is seen expanding by 0.7 percent this year, up from 0.3 percent in 2016 and 0.6 percent previously forecast. In the second quarter of this year Gross Domestic Product grew by an annual rate of 1.1 percent, up form 1.0 percent in the first quarter.
       For 2018 the economy is forecast to expand 1.2 percent, down from 1.3 percent, and in 2019 by 1.5 percent, down from 1.7 percent previously forecast.
       After rising steadily this year, the rand has come under recent pressure but was still trading at 13.9 to the U.S. dollar today, little changed from 13.7 at the start of this year.

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South Africa maintains rate but 3 members wanted a cut

    South Africa's central bank left its benchmark repurchase rate at 6.75 percent, citing "heightened uncertainties in the economy" as capital investments continue to contract due to low business confidence and political uncertainty.
      The South African Reserve Bank (SARB), which surprised investors by cutting its rate by 25 basis points in July, said three members of its 6-member monetary policy committee wanted to cut the rate by another 25 points while the other three wanted to retain the rate and ultimately held sway.
      In an update to its economic forecast, SARB raised its 2017 growth forecast marginally to 0.6 percent from 0.5 percent and narrowed the output gap to minus 1.7 percent from minus 1.9 percent.
      For 2018 and 2019 the central bank maintained its growth forecasts of 1.2 percent and 1.5 percent, respectively. In 2016 the economy grew by only 0.3 percent.
      Despite positive growth in the second quarter after two consecutive quarters of contraction, SARB Governor Lesetja Kganyago said a fall in fixed capital formation showed underlying weakness in the economy and of particular concern was a 6.9 percent drop in private sector fixed investment.
     "This subdued outlook is expected to persist against a backdrop of continued political and policy uncertainty," Kganyago said, adding weak investment doesn't bode well for employment, with the unemployment rate steady at 27.7 percent in the second quarter.
      The public sector, which used to be the main source of employment growth, is now also likely to shed jobs as fiscal constraints intensify.
      Although SARB expects inflation to remain within its 3-6 percent target range in coming years, Kganyago said a number of risks to this outlook had increased and "the MPC assesses the risks to the inflation outlook to be somewhat on the upside."
      The exchange rate of South Africa's rand remains a key upside to the inflation outlook along with political risks, which he said were "now more imminent" along with the risk of further ratings downgrades, given the increased fiscal challenges and political uncertainty.
      A further upside risk to inflation stems from possible large increases in electricity tariffs, with a tariff increase of 20 percent boosting the inflation forecast by 0.2-0.3 percentage points.
      The central bank is also concerned that inflation expectations of business people and trade unions remain above or close to 6 percent for the next two years.
      "Lower inflation expectations among key price setters is an important element in reducing inflation in the future, thus enabling lower nominal interest rates," Kganyago said.
     South Africa's inflation rate rose to 4.8 percent in August from 4.6 percent and SARB retained its forecast for inflation to average 5.3 percent this year, down from 6.3 percent last year. For 2018 it raised its forecast slightly to 5.0 percent from 4.9 percent and to 5.3 percent in 2019 from 5.2 percent.
      SARB currently targets inflation in range of 3-6 percent but Kganyago said last month this 18-year old target should probably be lowered to bring it into line with other emerging markets.
      He suggested that a target of 3-4 percent would be more in line with that of South Africa's trading partners, adding that Brazil had recently lowered its target to 4.0 percent and India last year adopted a 4 percent target.
      After hitting a record low of almost 16.9 to the U.S. dollar in January last year, the rand has risen, supported by demand for high-yielding emerging market bonds amid easy global monetary policy.
      But the rand remains very sensitive to political developments, weak prospects for economic growth and is down 2.8 percent against the U.S. dollar since the July when SARB cut its rate.
     Today the rand was trading around 13.3 to the dollar, up 3 percent this year.

South Africa holds rate, ready to act on inflation threats

    South Africa's central bank left its benchmark repurchase rate steady at 7.0 percent, as expected, but said it remains concerned about the trajectory of inflation and it "remains ready to act appropriately to any significant change in the inflation outlook."
    The South African Reserve Bank (SARB), which has raised its rate by 200 basis points since January 2014, including 75 points this year, added a weak domestic economy, along with a rise in the rand's exchange rate and a marginal improvement in inflation, had provided it with room to delay a further tightening of policy "for now."
    However, SARB Governor Lesetja Kganyago added that the bank's monetary policy committee, which was unanimous in its decision, was aware that such favorable factors could reverse quickly and the impact of a higher rand on the outlook for inflation would depend on whether the exchange rate was sustained at this stronger level.
   South Africa's headline inflation rate rose to 6.3 percent in June from 6.1 percent in May but the bank lowered its outlook for 2016 inflation to average 6.6 percent from a previous 6.7 percent.
   "Nevertheless, inflation is still expected to accelerate further this year and is only expected to return to within the target range of 3-6 percent during the third quarter of 2017," Kganyago said, adding that inflation is expected to lead at 7.1 percent in the fourth quarter of this year, down from a previous forecast of 7.3 percent due to lower administered prices for petrol.
    For 2017 inflation is expected to average 6.0 percent, down from 6.2 percent, and then 5.5 percent in 2018, up from 5.4 percent.
    After depreciating steadily since 2011, the rand has been firming since mid-January and has reversed losses following the U.K. referendum on the European Union. The rand was trading at 14.2 to the U.S. dollar today, up on the SARB's policy decision, to have appreciated 9.3 percent this year, stronger than the central bank had expected.
    "Despite this recent strength, the rand remains vulnerable to possible "risk-off" global scenarios; changes in US monetary policy expectations; and domestic concerns including the possibility of ratings downgrades later in the year," Kganyago said.
    He added that the outlook for economic growth "remains extremely challenging." Although the 0.2 percent annual contraction in first quarter growth is expected to be the low point in the cycle, the recovery is expected to be weak.
    SARB revised down its growth forecast for 2016 to zero percent from a previous 0.6 percent. For 2017 growth is forecast of 1.1 percent, down from 1.3 percent, and for 2018 growth is seen at 1.5 percent, down from 1.7 percent.
    "The outlook is clouded by uncertainty surrounding the longer term market and global growth implications of Brexit," Kganyago added.

South Africa raises rate 25 bps on higher risks to inflation

    South Africa's central bank raised its benchmark repurchase rate by a further 25 basis points to 6.25 percent to prevent a rise in inflation expectations and more generalised inflation in light of growing downside risks from persistent exchange rate depreciation, higher electricity tariffs and a rise in food prices from drought.
    The South African Reserve Bank (SARB) has now raised its rate by 50 basis points this year and said four members of its monetary policy committee had voted to raise the rate while two members had preferred to retain the policy stance.
    "Complicating the decision was the deteriorating economic outlook," SARB Governor Lesetja Kganyago said, adding that the risks to the outlook were now considered to be on the downside while they were more of less balanced at the previous meeting in September.
    While changes to SARB's forecast for inflation was only minor, Kganyago underlined that the upside risks were now more pronounced and expected to outweigh the possible downside risks from lower global oil prices and a subdued pass-through of changes to the exchange rate.
    "While these factors cannot be dealt with directly through monetary policy, the concern of the Committee is that failure to act could cause inflation expectations to become unanchored and generate second-round effects and more generalized inflation," he said.
    Despite the rate rise, SARB still considers its policy stance to be accommodative and future actions will continue to focus on anchoring inflation within the bank's 3-6 percent range while remaining sensitive to the fragile state of the country's economy.
    The forecast for headline inflation this year was trimmed to 4.6 percent from a previous forecast of 4.7 percent and the forecast for core inflation was unchanged at 5.5 percent.
    For 2016 inflation was seen at 6.0 percent, down from 6.2 percent and core inflation at 5.5 percent, up from 5.4 percent. For 2017 headline inflation was forecast at an unchanged 5.8 percent and core inflation at 5.4 percent, up from 5.3 percent.
    Headline inflation in October was 4.7 percent, up from 4.6 percent in September.
    The forecast for Gross Domestic Product growth in 2015 was trimmed to 1.4 percent from 1.5 percent and 1.5 percent for 2016 from 1.6 percent. For 2017 GDP was forecast to expand by an unchanged 2.1 percent.
    In the second quarter of this year, South African's GDP grew by an annual rate of 1.2 percent, down from 2.1 percent in the first quarter.
    The Rand has been on a weakening trend since mid-2011 when it was above 7 to the U.S. dollar. The rand has experienced volatile trading in recent years, not only due to expectations about U.S. monetary policy but also domestic factors, such as labor unrest.
    Since the last meeting by the central bank's monetary policy committee in September, the rand has depreciated 3 percent against the dollar and today it was trading at 14.12 to the dollar,  down 17.8 percent this year alone.
    "As before, the extent to which Fed tightening has been priced into the exchange rate remains uncertain," SARB said, adding that volatility and overshooting of the exchange rate is likely ahead of and in the immediate aftermath of any change to U.S. rates.

South Africa raises rate 25 bps, changes depend on data

    South Africa's central bank raised its benchmark repurchase rate by 25 basis points to 6.0 percent, as expected by many economists, and said it would continue to be sensitive to the "fragile state" of the country's economy but that any future rate changes would depend on incoming economic data.
    The South African Reserve Bank (SARB), which raised its rate for the first time in 12 months after putting its tightening cycle on hold in July 2014, said it had to be "mindful of the risk of second-round effects on inflation and the committee is concerned that failure to act against these heightened pressures and risks will cause inflation expectations to become entrenched at higher levels."
    Four members of the central bank's monetary policy committee voted to raise the rate by 25 basis points while two members wanted to maintain rates.
    Although South Africa's inflation rate rose by less than expected in June to 4.7 percent from 4.6 percent, SARB considers this to be a temporary respite as forecasts for inflation remain high and there are continued upside risks, especially from high wage growth, entrenched inflation expectations that exceed the bank's target range, and further depreciation of the South African rand.
     "Headline inflation is expected to breach the upper end of the target range during the first two quarters of next year, while upside risks posed by the exchange rate have increased," said SARB Governor Lesetja Kganyago.
    In May SARB forecast inflation would breach its target range in the first quarter of 2016 before declining to 6.0 percent in the second quarter. SARB targets inflation in a range of 3 to 6 percent.
    SARB now expects inflation of 6.9 percent in the first quarter of 2016 and 6.1 percent in the second quarter and raised its 2015 forecast to an average of 5.0 percent from a previous 4.9 percent.
    But for 2016 it maintained its forecast for inflation to average 6.1 percent and then decline to 5.7 percent 2017.
    The rand has been depreciating since mid-2011 and is highly sensitive to global risks, such as the Greek crises, and expectations that the U.S. Federal Reserve will start to tighten its policy.
    Since the previous meeting of the SARB in May, the rand has depreciated by 5 percent against the U.S. dollar and was trading at 12.39 to the dollar today, down 6.9 percent this year.

South Africa holds rate but to raise when appropriate

     South Africa's central bank held its benchmark repurchase rate steady at 5.75 percent but cautioned that "the deteriorating inflation outlook suggests that this unchanged stance cannot be maintained indefinitely" and it is closely monitoring the outlook for inflation and "stands ready to act when appropriate."
    The South African Reserve Bank (SARB), which raised its rate by 75 basis points last year and long maintained that it will return to tighter monetary policy to curb inflation, raised its forecast for inflation to average 4.9 percent this year from its March forecast of 4.8 percent, and to average 6.1 percent next year, up from its previous forecast of 5.9 percent.
    In April South African's consumer price inflation rate rose to 4.5 percent in April from 4.0 percent in March with last year's decline in oil prices helping check energy prices.
    But inflation is expected to peak at 6.8 percent in the first quarter of 2016 - temporarily breaching the central bank's upper inflation limit - before declining to 6.0 percent in the second quarter. SARB targets inflation in a range of 3 to 6 percent.
    SARB also extended its inflation forecast to 2017, forecasting average inflation of 5.7 percent for the year and 5.6 percent in the fourth quarter.
    While the central bank described the upward revision as "relatively small," its monetary policy committee is increasingly concerned over the "persistence of medium term inflation at elevated levels" and upside risks make its forecasts vulnerable to any changes in inflation pressures.
    The main risks to SARB's inflation outlook remains higher than expected increases to electricity tariffs, changes to the exchange rate of the rand and wage settlements.
    "The rand remains vulnerable to global market reaction to US policy normalization, particularly in the context of South Africa's twin deficits," SARB said, adding that "any significant weakening of the exchange rate in reaction to US monetary policy tightening could cause inflation to diverge even further from target, and set in motion an exchange rate-inflation spiral."
    The rand has been depreciating since mid-2011 and based on past experience, SARB expects some further pressure on the exchange rate and long bond yields as the start of the U.S. tightening cycle becomes more certain.
    Today the rand was trading around 11.8 to the U.S. dollar, down only 1.7 percent since the start of the year but down 11 percent since the start of 2014.
    The outlook for South Africa's economy also remains weak due to continuing electricity supply constraints, and low and declining business and consumer confidence.
    SARB trimmed its forecast for Gross Domestic Product growth to 2.1 percent for 2015 and 2.2 percent for 2016, largely in line with its estimate of potential growth of 2-2.5 percent. In 2017 growth is expected to accelerate to 2.7 percent, based on less electricity shortage.