Interest rate cut unlikely on credit downgrade fears

The likelihood of an interest rate cut on Thursday is low, despite inflation easing in September. While inflation remains comfortably within the target band of 3% to 6%, hopes for another interest rate cut in 2017 are dwindling as fears mount of a credit downgrade on Friday.

The likelihood of an interest rate cut on Thursday is low, despite inflation easing in September.

While inflation remains comfortably within the target band of 3% to 6%, hopes for another interest rate cut in 2017 are dwindling as fears mount of a credit downgrade on Friday.

While most economists expect a credit rating downgrade after the ANC’s elective conference in December, the medium-term budget policy statement renewed concerns that a downgrade would happen on Friday.

Moody’s and Fitch took an unfavourable view of Finance Minister Malusi Gigaba’s budget policy statement in October.

Investec chief economist Annabel Bishop expected Moody’s, the only ratings agency that has SA one notch above junk status, to downgrade the foreign and local currency front. S&P is expected to follow suit.

The consumer price index rose 4.8% year on year in October, after a 5.1% increase the month before.

“As things stand, it appears the interest rate cut this year may have been a one-off, rather than the beginning of a lowering cycle,” First National Bank economist Jason Muscat said.

Nedbank economist Busisiwe Radebe said that while consumer and producer inflation were expected to remain below the Reserve Bank’s 6% upper target range, and underlying economic fundamentals remained weak and confidence fragile, which left room for rates to be cut, the Bank was unlikely to do so.

“This will be dependent on the trajectory of the rand, which is likely to remain volatile ahead of credit rating agency updates and the ANC’s elective conference,” she said.

“We believe that the Reserve Bank will take a wait-and-see approach and leave interest rates on hold and perhaps throughout 2018.”

BNP Paribas economist Jeff Schultz said the monetary policy committee would be hardpressed to not keep policy rates on hold but added there was a possibility of cuts early in 2018.

“We think that should SA’s political climate stabilise post December 2017, the outlook for inflation and inflation expectations could improve further and rate cuts could come back in vogue from early next year. The risks are large, however, given the fluid nature of the political environment,” Schultz said.

Stanlib chief economist Kevin Lings said: “While the inflation and growth dynamics of the South African economy would justify a further rate cut, the Reserve Bank will still be hesitant to cut rates given the proximity of the credit rating decisions, as well as uncertainty associated with the outcome of the ANC elective conference.”