Deficit data eases pressure on Reserve Bank

Economists predict interest rate cuts if rand sustains strength

PRESSURE has eased on the Reserve Bank to raise interest rates this week as better-thanexpected key economic data has boosted hopes for rate cuts later this year.

An improvement in the trade deficit, which results in cheaper imports and an easing of high inflation, coupled with a stronger rand bode well for deliberations when the monetary policy committee meets from Tuesday to Thursday.

Economists believe interest rates may have peaked and the next move is downwards.

The committee has kept rates steady for the past 12 months, following sustained increases between January 2014 and March last year, which resulted in a cumulative increase of 200 basis points.

Elna Moolman, an economist at Macquarie Securities, said economists were likely to pay more attention this week to “whether the [Reserve Bank’s] rhetoric becomes less hawkish”.

A less hawkish Reserve Bank will strengthen Macquarie’s prediction of two 25-basis-point rate cuts at each of the last two committee meetings of 2017, in September and November. But crucial to this was that inflation slowed to 5.5% and remained around 5% for a prolonged period, she said.

A hawkish stance favours higher interest rates, and potential global and domestic political risk may provoke this. The current expectation is for a dovish stance, although rate cuts are predicted only for the second half of this year.

“In the near term, the Reserve Bank will probably remain cautious about the sustainability of the rand’s strength and it will therefore be reluctant to cut interest rates soon,” said Moolman.

Inflation was expected to average just over 5% next year.

On Wednesday, data published by Stats SA showed that inflation had begun its descent. For February, inflation eased to 6.3% from January’s 6.6%. But even as food inflation slowed, there was a slight uptick in insurance costs because of higher medical aid premiums. The market had expected inflation to be around 6.4%.

David Faulkner, an economist at HSBC, said: “After keeping rates unchanged over the past year, the stronger rand, moderation in recent CPI [consumer price index] readings and an improved current account deficit should support rates being kept unchanged.”

The current account narrowed from a revised 3.8% of GDP in the third quarter of last year to 1.7% by the end of the year — its best level since 2010.

On Wednesday, the Reserve Bank said this was the result of stronger export volumes and favourable terms of trade.

The decline of the deficit on the income account allowed the current-account shortfall to narrow to an almost six-year low, Faulkner said.

Last week S&P Global Ratings forecast that emerging markets, including South Africa, may return to a hawkish stance in 12 to 18 months.

This depends on the degree of uncertainty over US monetary policy over the coming months.

Nedbank economists said in a research note that for the rest of the year at least consumers can expect rate cuts.

“Should the currency hold up . . . then our baseline view is that interest rates have probably peaked, with the next move by the Reserve Bank likely to be down.

“We expect the monetary policy committee to start easing monetary policy in the second half of the year.”

The focus will be on whether bank’s rhetoric becomes less hawkish We expect the committee will ease policy in the second half of the year

THE next interest rate cut will happen between 3.21pm and 3.26pm on a Thursday. How can I be so specific? Monetary policy committee meetings at the Reserve Bank take place every two months, between a Tuesday and a Thursday. It’s when the governor and his advisers consider a mountain of often contradictory information in a bid to fulfil their mandate, which is to ensure price stability, or, in other words, keep inflation under control.

And the timing is an average of the duration of governor Lesetja Kganyago’s previous rates pronouncement media briefings.

You want a date? That’s much harder. Could be as soon as the third quarter. Maybe even August. True to the nature of economics, it depends on a range of factors — most domestic, nearly all political.

This week’s data supports the view of a rate cut by August. Inflation at 6.3% looks like it’s on a downward trajectory after peaking at 6.7%.

Inflation is likely to start falling quite quickly provided the rand remains stronger and political uncertainty grips other parts of the world more than it grips our own.

This week’s positive economic data provided a sliver of optimism that the Reserve Bank — which until now has been wary of the currency, and the inflation consequences of cutting rates while the US could aggressively raise its cost of money — might have room to deliver its first cuts in four years.

South Africa’s considerably higher-than-average interest rates have provided the rand with some support as the gap between rates here, and, say, the US or EU is significant enough to draw global yield-seeking portfolio flows to the local bond market. The fear is that if rates elsewhere rise quickly, the perceived greater security of lowyielding US treasuries will outweigh the benefits of the interest rate differential enjoyed by ZAR depositors.

Few people are more opinionated than my dentist on the subject. He believes low interest rates will stimulate the growth we need to grow the economy, which is suffering as a result of the high cost of capital. He knows he needs the best imported equipment to be costeffective, but high rates mean higher costs and less capacity to grow.

If he were Reserve Bank governor, he would slash rates by at least 300 basis points to shock the economy into life. Although it’s only half the equation, it’s hard to argue with a man probing at your ageing teeth with a sharp instrument made of imported German surgical steel.

In addition to the better inflation outlook — which is further improved by the expectation of lower food prices thanks to a bumper maize harvest — the current account surprised, too.

Our current account deficit in the last quarter of last year improved to 1.7% of GDP, its best level in six years, thanks in part to higher commodity prices which boosted the value of our exports, and the fact that we are importing less. But slow growth and slow demand for imports do little to boost confidence.

My dentist argues that rate cuts are a panacea. But no amount of interest-rate cutting by itself will provide the sustainable stimulus we need to grow.

The economy would benefit from a cheaper cost of capital — it might stimulate borrowing to fund purchases and pay for capital equipment at more reasonable rates — but that does not mean the country will race back to 3+% growth.

Besides, the inflationary effect of dramatic rates cuts would create all kinds of imbalances, including tempting an already over-indebted populace to borrow more to fund lifestyles they can barely afford. It might feel great for a quarter or three, but eventually inflation would take hold, forcing the Reserve Bank to counter its effects even more aggressively — which would bring the world’s biggest borrowing party to an agonising halt.

But I am not going to tell my dentist that. He is, after all, armed with a drill.

Whitfield is a public speaker on the political economy and an awardwinning financial journalist and broadcaster