Sarb considers bright future
HIGHLIGHTS: LOWER FOOD PRICES, STRONGER RAND BOOST PROSPECTS
We may still be swimming against the tide, but at least it’s not up to our necks anymore.
The SA Reserve Bank (Sarb) left its repo rate unchanged at 7% after its Monetary Policy Committee (MPC) meeting on March 30, amid heightened uncertainty over then finance minister Pravin Gordhan’s tenure.
As it turns out, President Jacob Zuma replaced Gordhan later that night with Malusi Gigaba.
Sarb did, nonetheless, indicate at the time “we may have reached the end of the tightening cycle”. Five committee members supported the unchanged stance, while one would have liked a 25 basis pionts interest rate cut.
The MPC members would have been wary of potential rand weakness and its impact on the inflation outlook should political tensions escalate.
Given an inflation rate above the 6% upper limit of its inflation target range at the time, the bank probably wanted to see a sustained improvement in the inflation data before acting. But, here’s the thing. The last two headline consumer price inflation (CPI) prints have surprised on the downside with CPI advancing just 5.3% in the year to April 2017, down from 6.1% in March 2017.
Admittedly, this partly reflects lower food price inflation. However, core CPI advanced by a mere 4.8% in the year to April.
Meanwhile, the rand is firmer than a year ago, implying it is likely to be a force for disinflation. So inflation forecasts are likely to be lowered. A case can be built for an average inflation rate of close to 5% next year – comfortably within the Sarb’s target.
The expectation is for no interest rate cut this month, partly because of worries that the level of the rand is not adequately pricing in the level of political risk.
There may also be some uncertainty as to the likely path of monetary (and fiscal) policy in the US.
Given currently available information the question is when and not if Sarb should cut its repo rate – especially since real GDP growth is still below potential with the Sarb signalling downside risk to growth in its March 2017 statement due to the potential impact of political uncertainty on private sector fixed investment spending.
Given the concern that rand volatility could return, thus posing inflation risk in an environment where inflation expectations are sticky at an elevated level, the Sarb seems set to leave its repo rate unchanged. But expectations of an interest rate cut at least by late this year are building.
Here’s hoping the rand can hang in there.
Arthur Kamp is investment economist at Sanlam Investments.