Repo rate cut in the offing at Bank meeting

Expectations are high that the South African Reserve Bank will cut the repo rate on Wednesday thanks to benign inflation, a robust rand and retreating political and credit risk.

The Reuters consensus is that the Bank’s monetary policy committee (MPC) will cut rates by 25 basis points to 6.5% this week. This would be the first cut in the Bank’s easing cycle since July 2017.

It is, however, unlikely to be a unanimous decision as some of the more hawkish members may raise concerns that a potential wage price spiral could be developing, as suggested by data in the latest Quarterly Bulletin, said First National Bank chief economist Mamello Matikinca.

If the Bank does cut this week, the consensus is that it will then keep rates on hold for the remainder of the year.

According to BNP Paribas SA senior economist Jeffrey Schultz, there are several factors that should allow the MPC to look through the shortterm headache of a one percentage point rise in the VAT rate, even though it will add about 0.6 percentage point to the headline consumer price index (CPI) from April.

Among them is that headline inflation is now running well below the mid-point of the 3%6% inflation target band; the rand has remained strong all year; and SA’s political risk premium and external vulnerabilities have improved.

Furthermore, most economists expect the Bank to revise down its longer-term inflation projections.

Consumer inflation slowed to 4% in February from 4.4% in January, beating the prevailing consensus expectation of 4.2%.

The slowdown was mostly driven by food and fuel inflation. Food inflation slowed significantly from 4.5% year on year in January to 3.9% year on year in February – its weakest print since late 2013.

“The greater effort at fiscal consolidation means that monetary policy can be a touch more accommodative…. Moreover, the dampening effect on prices of recent rand gains will continue to feed through the economy. Even expectations of faster growth and a recovery in demand will not offset this entirely,” said Standard Chartered Bank’s chief economist, Razia Khan, who is also hoping for a rate cut.

Capital Economics’s Africa economist, John Ashbourne, is less sure. He expects the Bank to leave the repo rate on hold at 6.75% in order to first assess the outcome of the VAT hike.

On Thursday private sector credit extension (PSCE) data, producer prices and the trade balance for February, as well as the Quarterly Employment Survey for the final quarter of 2017, will be released.

Economists expect a small moderation in headline PSCE growth from 5.5% in January on softer corporate credit momentum, and the producer price index is likely to have followed the CPI lower to 5% (previously 5.1%) on weaker fuel prices and a stronger rand.

The February trade deficit is likely to have narrowed sharply after the shortfall spiked to R27.7bn in January on largely one-off equipment imports.