Threat to inflation rules out further rate cuts, says analysts
EXPERTS forecast no more interest rate cuts for the remainder of this year as well as next year as factors threatening inflation are rising fast.
Last month, the Reserve Bank’s monetary policy committee (MPC) cut rates by 25bps from 6.75% to 6.50%.
But since the last meeting of the MPC, the cocktail of a 1% increase in VAT, 52c/l fuel levy and rising Brent crude oil prices pose a threat to inflation and the rand.
Some economists warned South African consumers to fasten their belts going forward as the Reserve Bank can be forced to hike rates again if the environment becomes dire.
“We anticipate CPI inflation to be published by Stat SA tomorrow to have inched to 4.1% in March from 4% the month before.
“Inflation should tick up as the VAT increase takes effect. We don’t see any further hikes as a starting point. Our view is that rates will stay on hold for this year and likely for the entire 2019,” RMB economist Mpho Tsebe said.
He said while inflation is expected to remain within the Reserve Bank’s band target of 3.6%, one of the risks going forward is high oil prices, which in turn will impact on the rand and the domestic fuel price.
“Geopolitical tensions, as the US and its allies launched missile attack on Syria is likely to impact on the oil price if it drags long.
“The price of Brent crude oil rose to $72 a barrel last Friday, the highest level since 2014 as market participants worried about prolonged geopolitical tensions in Syria,” Tsebe said.
She said that despite all the risks, most important was the fact that inflation is going to remain within the target band.
Jonathan Sello, independent economist and consumer expert, warned consumer to tighten their belts as the threats to inflation become real and that it could strike a major blow to their disposable income, especially the increase in the fuel price.
When the MPC delivered its decision to cut rates by 25bps last month, Reserve Bank governor Lesetja Kganyago said the MPC was of the view that in light of the improved inflation outlook and the moderation in risks to the forecast, there was some room to provide further accommodation without undermining the inflation trajectory or the downward trend in inflation expectations.
But Kganyago warned that in this uncertain environment, future policy decisions will be highly data dependent and sensitive to the assessment of the balance of risks to the outlook.
The MPC has strongly emphasised that the implied path remains a broad policy guide which can and does change in either direction between meetings in response to new developments and changing risks.
“Therefore, the MPC does not mechanistically respond to changes in the path,” Kganyago said.
NO MOVE: Experts have forecast that the Reserve Bank will not cut interest rates again this year.