Hold thumbs for a cut in interest rates
Economists say chances are good for a rate cut this week
● Indebted South Africans could be in for good news on interest rates, many economists predict.
They say the South African Reserve Bank’s monetary policy committee is expected to cut interest rates by 25 basis points this week following benign consumer inflation data for February. However, the increases in VAT and the fuel levy have complicated the picture.
Twelve out of 15 economists surveyed by Bloomberg expect the Reserve Bank to cut the repo rate from the current 6.75%.
Goolam Ballim, chief economist at Standard Bank, said the interest rate decision “is a finely poised call, with a slight edge in favour of a 25 basis points rate cut”. Notably, the rand was stronger and oil prices had eased since the bank’s last meeting, he said.
The inflation pressures induced by the tax increases in the budget in February would be transient.
But Ballim said he would not be “entirely surprised” if the bank held back at this stage. “There’s generous growth tonic from the politically induced mood lift and the generalised reform initiatives that are rapidly unfolding. Nonetheless, we believe the Reserve Bank may on two occasions trim rates by 25 basis points through 2018,” he said.
At 4% in February, consumer inflation remains well within the Reserve Bank’s target range of between 3% and 6%. This is the 11th consecutive month inflation has come in below the 6% upper-target level.
Nicky Weimar, a senior economist at Nedbank, said they were “hoping for and forecasting” a 25 basis points cut. She said it was the last opportunity to give relief in the form of an interest rate cut; later this year it would be harder to justify such a move as inflation was tracking upward.
Next year it would be virtually impossible as the effect of a monetary tightening cycle by the US Federal Reserve would probably start to be felt in emerging markets, she said.
The Fed lifted interest rates by 25 basis points to 1.75% on Wednesday while also forecasting that rates would rise higher than expected in the coming years.
Window of opportunity
Weimar said inflation in South Africa was expected to start trending higher this year and next but to remain within the target range. The hike in VAT and the fuel levy would create a base change, and global economic growth would encourage inflation.
“By next year the inflation story is a far less enticing one and then your window of opportunity to provide some stimulus to an economy that is still very much broken, still very much weak, has passed.”
Weimar said last year’s GDP growth of 1.3%, while better than economists had expected, was still weak.
She said an interest rate cut would be significant for consumers who would be paying marginally less for their cars and homes.
The cut was unlikely to take the economy to 2% growth, but in the absence of job creation or rising incomes, interest rate relief might help to “even things out and keep growth going”, she said.
“More than the real effect is the psychological effect, and that tends to support spending. Confidence is one of the key drivers and that is what this economy has been lacking for four years.”
Weimar said that although the monetary policy committee could argue this rate decision either way, the long-term trajectory for inflation was up, so members of the committee could easily argue that now was not the time to cut the rate.
Independent economist Ian Cruickshanks said the bank’s rate call was dependent on ratings agency Moody’s decision.
If Moody’s showed confidence in the local economy, then the Reserve Bank would have the leeway to cut rates.
But Cruickshanks said a cut in interest rates might lead to reduced foreign portfolio flows, which would not be beneficial.
John Ashbourne, Africa economist at Capital Economics, said the group expected the Reserve Bank to leave its key policy rate on hold. He said in a research note that members of the committee would want to wait and see what the impact of the VAT hike was. He added that balance of payments figures released on Tuesday may also give policymakers pause. The current account deficit widened from 2.1% of GDP in the third quarter of last year to 2.9% in the fourth quarter.
But Ashbourne said there was a possibility that even if the bank did not cut now, it might loosen policy later in the year.
Confidence is one of the key drivers and is what this economy has been lacking