‘Cyril factor’ spurs talk of interest rate cuts in 2018

● The rand’s relative strength since Cyril Ramaphosa’s victory at the ANC elective conference in December has prompted some economists to expect interest rate cuts in 2018. But this is unlikely at this week’s monetary policy committee meeting as local and global risks still cloud the horizon.

Jeffrey Schultz, an economist at BNP Paribas, said the Reserve Bank would have “room for manoeuvre” if the rand held on to its gains and if inflation undershot the bank’s estimates.

The Reserve Bank could easily cut rates after the February budget, but this week’s meeting would be too soon to do so. Schultz said two 25-basis-point reductions were possible this year, in March and May.

At the last MPC meeting, in November, interest rates remained unchanged at 6.75%. At the time, Reserve Bank governor Lesetja Kganyago highlighted the weaker rand, the poor employment outlook, uncertainty over the ANC conference, the tightening of US monetary policy, a rise in the oil price and negative reaction to the medium-term budget policy statement as issues of concern.

A few of those factors have been mitigated since then — particularly the rand, which has strengthened by 8% over the past year. On the back of the rand’s strength, six out of the 10 economists polled by Business Times this week expect cuts this year if the rand maintains the gains it has made.

Gina Schoeman, South Africa economist for the Citibank global economics team, said the rand’s strength was likely to help the Reserve Bank’s inflation outlook.

According to Reuters, consumer price inflation is expected to average 5.1% this year and 5.4% the next.

Schoeman said the Reserve Bank was in a sweet spot with the relatively favourable inflation outlook for South Africa.

“Inflation is likely to be just around or just below 5% in Q1 and while the inflation outlook could start to rise in Q2 it will be moderate, and even if it starts to lift for 2018, it is very unlikely that it is going to go well above 6%. So does the SARB have to be hawkish? No, I don’t think so. The question is how dovish can they actually be at this point because we’ve only seen them cut rates once midyear, last July, and . . . it was just 25 basis points,” she said.

Goolam Ballim, chief economist and global head of research at Standard Bank, agreed that the country could see modest interest rate cuts this year.

A relapse in the rand, an uptick in the oil price — which reached $70 a barrel this week — and any risk to agricultural production would pose the most material threats to the inflation outlook, he said.

But some expect interest rate hikes in 2018.

Economists Ian Cruickshanks and Dawie Roodt said the international cycle on monetary policy was moving in the direction of tightening rather than easing, and that might force the Reserve Bank to follow.