Reserve Bank likely to lower interest rates

The Reserve Bank’s monetary policy decision on Thursday is the main economic event of the week. The Bank is expected to lower interest rates despite a likely rise in inflation numbers.

Second-tier data on tourist accommodation, land transport and food and beverage sales will be released on Monday, while tourism and migration figures will be out on Tuesday.

CPI inflation for August will be published on Wednesday, the day before the September monetary policy committee (MPC) meeting.

Most economists expect headline CPI to lift slightly to 4.9% year on year, from 4.6% in July, owing to low statistical base effects and the 19c/litre petrol price hike in August.

Food inflation is expected to continue to moderate, however, assisted by a notable decline in grain prices.

“The committee is likely to look through the August CPI number and note that inflation is set to begin moderating again in the fourth quarter of the year,” said Mamello Matikinca, a senior economist at FNB.

Despite the rebound in GDP in the second quarter, taking SA out of a technical recession, the consensus is that the economic backdrop has remained weak and conducive to further monetary easing.

Citi Bank economist Gina Schoeman described the rise in second-quarter growth as a “dead-cat bounce” in that it was driven mainly by temporary, technical factors.

She expects growth to slow to only a few decimal points in the third quarter and to average 0.7% for the year as a whole. The Reserve Bank’s 2017 growth forecast is even weaker at just 0.5%.

With the economy’s growth potential estimated to be around 1%, Schoeman believed the output gap remained sufficiently large to guard against a material threat to inflation’s 6% target ceiling.

The Bank’s leading indicator, business confidence and the purchasing managers’ indices all suggest the economy will slip back towards stagnation in subsequent quarters, according to Investec economist Kamilla Kaplan. “Weak economic growth, subdued private sector credit dynamics and subsiding wage pressures will contribute to a continued absence of meaningful demand-led inflationary pressures,” she said.

Matikinca, Schoeman and Kaplan all expect the Bank to cut the repo rate by 25 basis points on Thursday, taking it to 6.5%.

Sanlam Investments economist Arthur Kamp feels that, on balance, considering the latent risks to the outlook, a shallow interest rate-cutting cycle is on the cards.

CITI BANK’S GINA SCHOEMAN DESCRIBED THE RISE IN SECOND-QUARTER GROWTH AS A “DEADCAT BOUNCE”