More rate cuts not inevitable

THE Reserve Bank’s monetary policy committee is not committing to a rate-cutting cycle despite a lower inflation outlook and higher growth expectations.

While the inflation and growth forecast have improved markedly, the Bank emphasised that they still had not reached optimal levels.

It expected inflation to remain within the target band of 3% to 6% in the medium term, averaging 4.9% in 2018 and 5.2% in 2019, while GDP was expected to pick up further after a surprise recovery in 2017 to 1.7% in 2018 and 1.5% in 2019.

“With the positive developments in SA, a basis has been laid for an economic recovery. We could be underestimating what the growth rate could actually be,” said Bank governor Lesetja Kganyago.

This was a result of improved political conditions and a resurgence of business and consumer confidence. “Growth is expected to accelerate and could climb faster given successful implementation of structural reforms.”

In the past year, the committee has had to contend with credit ratings downgrades, exchange rate depreciation, a dramatic political transition and then the steady appreciation of the rand.

The Bank’s quarterly projection model points to a possible interest rate hike cycle, with an increase of 25 basis points expected in 2019.

“The shocks that pushed inflation under 4.5% are fading, and higher taxes, especially value-added tax, will raise inflation again in the near term,” the review stated.