Poll suggests Reserve Bank may cut rates

The SA Reserve Bank (Sarb) may cut its repo rate by 25 basis points to 6.5% just days after Moody’s is expected to give SA another chance to reform its finances, a Reuters poll found.

Fifteen of 22 economists said Sarb would cut interest rates by 25 basis points on March 28, while two penciled in a 50 basis-point cut. Five said there would be no change.

“Politically, a 25 basis-point cut could be seen as the Sarb contributing to boost the economy towards growth and employment creation, and it will go some way to help offset the impact of the VAT increase,” said Elize Kruger at NKC African Economics.

The central bank cut the repo rate by a quarter of a percentage point to 6.75% in July and if cut this month it is expected to remain at 6.5% until the end of 2019.

SA will learn soon whether Cyril Ramaphosa’s first month as president has helped the country hold on to its last investment grade rating.

Following downgrades by S&P and Fitch, Moody’s publishes the results of its review tomorrow. All but two of 18 economists said SA would avoid a credit rating downgrade.

A cut to junk by Moody’s would see SA removed from Citi’s influential World Government Bond Index (WGBI), triggering up to R100 billion in selling by foreign investors.

“We expect Moody’s to leave its ratings unchanged this month,” said Peter Attard Montalto at Nomura International.

Sarb expects the VAT hike to lift inflation by around 0.6 percentage points over the coming year, though it doesn’t expect to raise interest rates.

Kruger said the bank has the option of rewarding the economy with a bit of stimulation by looking through the VAT hike as an exogenous one-off development.

Or the bank could be conservative and use the VAT hike as a reason not to cut rates, she said. –