Reserve Bank seen to hold repo rate steady

The major domestic economic event this week will be the July meeting of the Monetary Policy Committee (MPC). An interest rate cut is starting to become a possibility as a result of slower growth and falling inflation but the Reserve Bank is more likely to pause for now.

First up, on Wednesday, Statistics SA will release the consumer price index (CPI) for June. First National Bank (FNB) senior economist Mamello Matikinca is expecting headline inflation to have eased further in June to 5.1% year on year from 5.4% in May, largely due to a decline in fuel prices.

Several surveys have noted that SA’s inflation momentum is softening on lower food price inflation, a lower rand-denominated oil price, relative rand resilience and the absence of demand-led inflation pressures in the economy.

According to Citi Bank, there are fewer items in the CPI basket rising now than in all the years since 2010. The last time core inflation was as low as 4.8% was in April 2010 in the aftermath of the global crisis.

The Reserve Bank is widely expected to lower both its growth and inflation forecasts at this week’s MPC meeting given the deeply disappointing first-quarter GDP growth numbers and the better-thanexpected inflation outcomes in April and May. Though it is expected to issue a more dovish statement than at the May MPC meeting, many economists believe the Bank is not yet ready to begin a new cutting cycle and will hold the repo rate steady at 7%.

Normally if inflation surprised consistently on the downside when the economy was in recession, the Bank would cut rates to ease pressure on households and firms. Some economists say there is room to cut rates by a cumulative 50 basis points in 2017 on these grounds.

However, the Bank has to balance this against the fact that lower interest rates would reduce the yield-attraction of the rand and so increase SA’s vulnerability to foreign capital flight at a time when global and domestic risks are rising.

The recent contestation over the Bank’s mandate is also likely to make the MPC wary of creating any impression that it might be bowing to political pressure by easing rates at this time — something that would do irreparable harm to its credibility as an inflation fighter.

Stats SA will publish retail sales on Wednesday. In the first quarter, retail sales fell by 1% year on year and, based on survey evidence, a meaningful rebound is not likely.

Matikinca expects retail sales to have weakened and would not be surprised by a contraction. “High unemployment, weak credit demand and confidence should have weighed on sales growth.

“Also, base effects should have kept a lid on year-on-year growth in retail sales in May.”