JOHANNESBURG: South Africa’s central bank slashed its key interest rate for the first time in five years Thursday, as the continent’s most advanced economy battles recession and recent credit rating downgrades.
The bank dropped the cost of borrowing by 25 basis points to 6.75 percent while also cutting its growth forecast for 2017 from 1.0 percent to 0.5 percent.
Announcing the unexpected rate cut, Reserve Bank governor Lesetja Kganyago said the monetary policy committee “would not hesitate to reverse this decision should the inflation outlook and risks deteriorate”.
He added that underlying demand in the economy was “extremely weak”, raising concerns over inflation which though currently at 5.4 percent, is toward the upper end of the bank’s target of between 3 and 6 percent.
In the first quarter of 2017 South Africa’s economy slipped into its first recession in eight years as key industries struggled to sustain growth.
“The economy has now recorded two successive quarters of negative growth… the outlook remains challenging,” Kganyago said.
Unemployment, which weighed heavily on South Africa’s growth prospects, is at a record high of 27.7 percent.
The bank also cut its 2018 growth forecast from 1.5 percent to 1.2 percent.
South Africa’s economic woes have been worsened by the political uncertainty that followed President Jacob Zuma’s March reshuffle of ministers.
The controversial shake-up, which included the axing of respected finance minister Pravin Gordhan and his deputy Mcebisi Jonas, sent tremors through the financial system and led ratings agencies Fitch and Standard & Poor’s to downgrade South Africa’s credit rating to junk status.
Gordhan, a strong opponent of corruption, was replaced as finance minister by Malusi Gigaba who is largely seen as a Zuma ally and is new to the finance brief.