Central Bank of Lesotho: Economy to maintain moderate growth

Lesotho's Monetary Policy Committee recently decided to maintain rates at 7.75 per cent, highlighting the risks posed by adverse weather shocks and a weaker exchange rate on inflation. The country's currency is pegged to the rand, prompting a discussion on the inflation outlook following the rand's recent surge to 11-month highs and its potential impact on monetary policy. CNBC Africa spoke with Matsela Matsela, Head of Global Markets at Stanbic Bank Lesotho, to gain insights into the implications of these developments. Matsela emphasized the close relationship between South Africa and Lesotho, particularly in terms of currency dynamics. He noted the possibility of two interest rate cuts in South Africa and how they could influence Lesotho's monetary policy decisions moving forward. An encouraging update shared by Matsela was that Lesotho's year-on-year inflation for May decreased to 6.3 per cent from 7.1 per cent, while South Africa's inflation remained stable at 5.2 per cent. This correlation is significant as imported inflation from South Africa impacts Lesotho's disposable income and overall economic stability. Currently, there is a 50 basis point difference between the repo rates of the two countries, leading to expectations of a synchronized rate cut should South Africa initiate one. The conversation also delved into the possibility of Lesotho's central bank making a move ahead of the South African Reserve Bank (SARB). Matsela highlighted a notable drop in Lesotho's inflation levels and the existing buffer created to counter high inflation rates. The recent decrease in food inflation played a pivotal role in this reduction, although concerns about adverse weather conditions persist. Despite the risks associated with weather shocks, current inflation data presents a positive outlook for both Lesotho and South Africa. Moreover, Matsela touched on the potential impact of political developments in South Africa on Lesotho's economy. He expressed optimism about the positive implications of policy continuity and structural reforms in South Africa for Lesotho. The proximity of the two economies and the existing peg between their currencies indicate that what benefits South Africa could also bolster Lesotho's economic prospects. The strengthening rand has provided some relief for Lesotho's foreign currency obligations, signaling a favorable environment for the country's financial stability. In conclusion, Matsela's analysis underscores the interconnectedness of South Africa and Lesotho's economies and the shared challenges and opportunities they face. With inflation trends, interest rate adjustments, and external factors like political developments influencing monetary policy decisions, both countries are navigating towards sustainable economic growth and stability amidst evolving market conditions.