South Africa’s central bank Governor Gill Marcus said “further monetary easing is not automatic” after surprising economists by lowering interest rates last week to spur the economy.
“There has been much speculation as to whether this was a beginning of a renewed interest rate easing cycle,” Marcus said at the bank’s annual general meeting in Pretoria today. “This interest rate reduction should, however, be seen as part of the continued monetary policy response to the crisis that began in 2008.”
The Reserve Bank on July 19 cut its key interest rate by half a percentage point to 5 percent, the first reduction since November 2010, after inflation eased into the bank’s target range while the economy faltered. The debt crisis in Europe, which buys about a third of South Africa’s manufactured goods, is threatening the growth outlook, Marcus said.
Europe “looks increasingly precarious,” Marcus said. “A quick resolution to the euro-zone crisis is unlikely and this poses continuing risks to our own growth prospects.”
Inflation slowed to 5.5 percent in June, staying within the bank’s 3 percent to 6 percent target range.
Investors have increased bets Marcus will lower the benchmark rate again before the end of the year. Yields on forward-rate agreements due in December dropped 51 basis points, or 0.51 percentage point, in the past month to 4.74 percent at 11:49 a.m. in Johannesburg.
“Further monetary easing is not automatic and will be highly dependent on global and domestic developments,” Marcus said.
Marcus said the bank’s economic growth forecast of 2.7 percent for this year was partly based on the assumption that European leaders would make the “appropriate policy responses.” At the same time, the bank “needs to remain vigilant to inflation and financial stability risks.”
The rand was little changed at 8.2659 per dollar at 2:07 p.m. in Johannesburg. The yield on the rand bond due in 2021 dropped 1 basis point to 6.55 percent.
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