Sarb may cut interest rates further, says Fitch’s BMI

BMI RESEARCH, a Fitch Group company yesterday said that it expected the SA Reserve Bank (Sarb) to cut interest rates further on the cooling inflation and weaker-than-expected growth.

BMI said in its Africa Monitor Research note that Sarb was likely to adopt a cautious rate cut regime in the future, with a further 25 basis points (bps) expected next year.

The company however warned that risks remained finely balanced and that the cuts would not automatically result in investors overlooking the country’ domestic political challenges.

It said it expected inflation to ease to 5.6 percent from 5.9 percent it averaged year-on-year in the first five months of 2017.

“This forecast implies that we expect inflation to be between 5.5 percent to 4.8 percent over the months ahead,” BMI said. “While the agriculture sector is likely to continue to see gains as normalising weather patterns boost output, faltering metal prices and a deteriorating regulatory environment suggests headwinds to mining.

Limited growth “Moreover, with unemployment having hit a 14-year high, the large retail sector will see limited growth.”

Sarb’s Monetary Policy Committee last month pulled a rabbit out of the hat, cutting its benchmark rate by 25bps to 6.75 percent for the first time in five years with governor Lesetja Kganyago citing an improved inflation outlook and concern about the nation’s growth outlook as the key drivers behind the decision. Sarb expects inflation to remain within the target band of 3 to 6 percent until at least the end of 2019.

The central bank, however, trimmed its growth forecast to 0.5 percent from 1 percent and from 1.5 percent to 1.2 percent for 2018 following the contraction of the economy by an annualised 0.7 percent in the first quarter of this year which pushed the country into technical recession.

BMI said that South Africa’s relatively low savings rate of 16.3 percent of gross domestic product as of 2016 coupled with limited reform momentum would weigh on growth prospects.

“The relatively limited amount of skilled workers also drives up wages and production costs,” the firm said. “We also see constraints in terms of future growth.”