‘Rate cut limited’

The Reserve Bank’s (Sarb) ability to cut interest rates to boost the economy is limited by political and policy uncertainty and inflation that’s still not sufficiently anchored at the midpoint of its target range.

Investors pay a premium for SA debt to compensate for the risk of holding it and this constrains monetary policy by raising the interest rate needed to stabilise inflation, the bank said in its bi-annual Monetary Policy Review on Tuesday. That’s partly due to deteriorating fiscal metrics caused by bailouts for state-owned companies.

While price growth has shifted close to the middle of the band of 3% to 6%, expectations remain above 4.5%, suggesting the rate has not yet been anchored at the midpoint, according to the Sarb.

“Were inflation lower, the repo outlook could be more accommodative,” it said. “If the sovereign risk premium were to come down, the neutral rate would moderate and monetary policy would enjoy more space. However, even a significantly more expansionary repo stance would very likely not deliver growth rates adequate to SA’s challenges, given acute constraints elsewhere in the economy.”

Finance Minister Tito Mboweni will present the mid-term budget on October 30 and is expected to confirm a larger shortfall than projected in February after an additional R59 billion bailout for Eskom. Investors are cautious of fiscal dynamics, with long-run sustainability coming in to question, it said.

Slowing wage growth, weak expansion in the tertiary sector and trade surpluses due to less imports show the economy has a shortage of demand. GDP will probably expand 0.6% this year and the potential growth rate has fallen to about 1%.

The MPC quarterly projection model points to the benchmark rate being unchanged until the end of 2021. Inflation quickened to 4.3% in August.

While weak demand should respond to interest-rate adjustments, policy uncertainty is a “problem larger than monetary policy”, the Sarb said. Business confidence is at the lowest level in more than three decades and an index measuring sentiment in the manufacturing sector fell to the weakest last month since August 2009.