Sarb Expected to Cut Interest Rate to Stimulate Growth
By Joburg Post
South Africa is gearing up for a possible interest rate cut tomorrow, as moderating inflation pushes for a rate respite to inject cash into the struggling economy.
The monetary policy committee (MPC) of the SA Reserve Bank (Sarb) is widely expected to cut interest rates by at least 25 basis points for the first time since March 2018 on weak economic growth, subdued inflation and the dovish global monetary climate.
Inflation rose to 4.5 percent in May from 4.4 percent in the prior month, but still in the mid-point of the Sarb’s target range of 3 to 6 percent. Bank of America Merrill Lynch said its researchers had penciled in the 25 basis point cut to be followed by two cuts in September and January.
“The rand stands to benefit disproportionately from risk-in emerging markets (EMs). Real 10-year yields based on core inflation is 5 percent, the highest since 2011 and substantially above many major EM peers,”
Merrill Lynch said.
The May consumer price data marked the sixth consecutive month that year-on-year inflation settled below the midpoint of the central bank’s target band. It last breached the top end of the range in March 2017.
The economy plunged 3.2 percent in the first quarter, while the government’s fiscal position has worsened since the start of the year. Tumisho Grater, economic strategist at Novare, said the dovish tilt by global central banks, most notably the US Federal Reserve, had given the MPC some breathing room to cut interest rates. Grater said the expected rates ease would be a close call.
“Should the fiscal situation worsen significantly, this could have major implications for inflation expectations, not to mention the fact that this would increase the risk of a sovereign credit rating downgrade by Moody’s,”
Grater said.
“This may be one of the factors that could cause the Sarb to be reluctant to cut interest rates before there is some stabilisation or turnaround plan for government finances.”
The MPC last month kept the benchmark repo rate unchanged at 6.75 percent in a narrow three-to-two vote and said it expected headline inflation to average 4.5 percent in 2019, down from 4.8 percent. Rating agency Moody’s said with inflation well contained it expected the bank to cut the policy rate in the upcoming meetings. Sanlam Wealth’s director of investments, Alwyn van der Merwe, said a lot of factors favoured a 25 basis point cut tomorrow.
“There was noise about whether the Reserve Bank should consider economic activity, what with the 3.2 percent cut in growth in the first quarter, but I do not think it is a primary objective to take economic growth or the lack thereof into consideration in making this decision,” he said. NKC Africa Economics forecast an economic contraction in 2019 with real GDP growth at -0.2 percent versus the forecast of 0.8 percent at the time of the previous MPC meeting in May.
“With the conservative nature of the current MPC, it is unlikely that a larger cut will realise, though a 50-basis point cut could be fully justified in the current economic conditions,”
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