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South African central bank unexpectedly cuts key rate

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South African central bank unexpectedly cuts key rate

South Africa's central bank unexpectedly resumed monetary policy easing Jan. 16 as it downgraded its inflation forecasts and warned of a "fragile" economic outlook.

The South African Reserve Bank lowered its repurchase rate by 25 basis points to 6.25%, the first rate cut since July 2019. The rate cut was a unanimous decision by the bank's Monetary Policy Committee.

The central bank was expected to keep rates steady at 6.5%, Brown Brothers Harriman said in a note, with only a "small handful" of analysts projecting a rate cut of 25 basis points.

"The lower inflation forecast and improved risk profile opens some space to provide further policy accommodation to the economy," central bank governor Lesetja Kganyago said in a statement.

Inflation forecasts for the medium term have been revised down "significantly" from November 2019, said the central bank, which now projects headline inflation rates of 4.7% and 4.6% for 2020 and 2021, respectively. Core inflation forecasts for this year and the next were also lowered to 4.3% and 4.4%, respectively.

The central bank also lowered its growth forecasts for the South African economy for 2020 and 2021, to 1.2% and 1.6%, respectively, from 1.4% and 1.7% previously.

While global growth and inflation indicators have shown improvements, the domestic economy remains vulnerable, following a GDP contraction in the third quarter of 2019, the central bank said.

The bank hinted at further policy action in 2020, saying that the expectations for two rate cuts of 25 basis points each in the first and fourth quarters, as suggested by quarterly economic projections, remain "a broad policy guide."