Stockholm (Ekonamik) – The Bank of Korea (BoK) and the South African Reserve Bank (SARB) both lowered their interest rates by 25bps on July 18th. Following the decisions, the base interest rate is 1.5% in South Korea, while the of the policy repo rate is 6.5% in South Africa. While the decision was a surprise in South Korea, markets had anticipated the SARB’s decision. The Bank of Indonesia (BI) – the third central bank holding its monetary policy meeting this week – decided to hold rates still. However, it lowered its reserve requirements.
The decision by the BoK seems to have taken markets by surprise. According to The Hankyoreh – a South Korean daily newspaper – the rate cut was “a preemptive measure exceeding market expectations.” This was the first rate cut since 2016. According to the local newspaper, the decision was missed by 70% of specialist surveyed by Korea Financial Investment Association (KOFIA) at the beginning of July who predicted the rate would be frozen.
“Based on currently available information the Board considers that the pace of global economic growth has continued to slow as trade contracted mainly due to the US-China trade dispute,” said the press statement accompanying the decision of the BoK. “Global financial markets have been stable in general, with stock prices in major countries increasing in line primarily with expectations of monetary easing in major countries. Looking ahead, the Board sees global economic growth and the global financial markets as likely to be affected by factors such as the degree of the spread of trade protectionism, the changes in the monetary policies of major countries, and geopolitical risks.” Domestically, the BoK focused on slow growth in the construction industry. “The Board judges that the pace of domestic economic growth has slowed as construction investment has continued undergoing an adjustment and the slowdowns in exports and facilities investment have deepened, although consumption has continued to grow moderately.” It concluded by emphasising that it “will carefully monitor developments such as the US-China trade dispute, Japan’s export restrictions, any changes in the economies and monetary policies of major countries, the trend of increase in household debt, and geopolitical risks, while examining their effects on domestic growth and inflation.”
The SARB expressed similar concerns. “Global GDP is expected to average 3.3% in 2019 and stabilise around 3.5% from 2020. While global growth remains relatively healthy overall, recent indicators on trade and manufacturing have deteriorated sharply and a range of downside risks to growth remain. Growth in world trade volumes contracted for the fifth consecutive month, declining by 2.1% in April 2019. Trade tensions remain heightened, weighing on market confidence and lowering investment. Other downside risks include geopolitical developments and high levels of corporate and sovereign debt. Across most countries, there is limited policy space to respond to shocks.” At the same time, inflation was subdued the SARB noticed. “Inflation expectations have continued to moderate. According to the Bureau for Economic Research (BER) second-quarter survey, expectations are for headline inflation of 4.8% in 2019. Inflation expectations for 2020 and 2021 eased to 5.0% and 5.2%, respectively. Five-year-ahead inflation expectations remain unchanged at a historic low of 5.1%.” This was confirmed by break-even inflation rates which “have declined significantly since [the] last meeting, reflecting a firmer exchange rate and subdued domestic and global inflation pressures.”
In last week’s economic analysis article, Mamello Matikinca-Ngwenya, Jarred Sullivan, Matlhodi Matsei, Siphamandla Mkhwanazi and Geoff Nöltingat at First National Bank (FNB) anticipated the rate cut. “Given the weak domestic growth backdrop and muted inflationary pressures, we expect the SARB to cut the repo rate by 25 basis points next week. While the money market may be pricing in more aggressive cuts, we believe the SARB will take guidance from data releases and, importantly, will need to assess fiscal risks before easing policy further.”
“Today’s rate cut is expected to bring some relief to consumers who have been under pressure during the last few months,” Jacques Celliers, CEO of FNB, was quoted in an article from the Business Report. “Following a contraction in GDP during the first quarter, we look forward to improved conditions later in the year based on expectations of a good rebound and this, coupled with lower interest rates, may aid the anticipated recovery.”
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