Economic signals mixed ahead of rate decision
As inflation ticks up and retail growth slows, the monetary policy committee is not expected to cut rates
The most recent set of economic data ahead of the SA Reserve Bank’s latest monetary policy decision proved to be a mixed bag. While a report showing August inflation slightly above market estimates probably killed off the slim chance of a cut on Thursday, retail numbers underlined how subdued consumer demand is, supporting the case for easier policy before the end of 2019.
The last set of economic data ahead of the Reserve Bank’s latest monetary policy decision proved to be a mixed bag.
While a report showing August inflation slightly above market estimates probably killed off the slim chance of a cut on Thursday, retail numbers underlined how subdued consumer demand is, supporting the case for easier policy before the end of 2019.
Consumer prices grew 4.3% compared with a year earlier, up from 4% in July and above the 4.2% median of economists surveyed by Bloomberg, Stats SA said on Wednesday.
The higher reading, driven by food prices that rose at the fastest pace in 18 months, was still comfortably around the midpoint of the Bank’s 3%-6% target range. The other major contributors to the acceleration in inflation were housing and utilities prices, notably electricity, the agency said.
The majority of economists surveyed by Bloomberg 15 out of 18 expect the monetary policy committee (MPC) to keep the repo rate unchanged at 6.5%.
The Bank reduced the rate by 25 basis points in July as it downgraded its growth and inflation forecasts. It predicts that the economy will grow just 0.6% in 2019.
The meeting comes in a week in which the oil market was roiled by attacks on Saudi Arabian oilfields, pushing Brent crude prices up almost 20% after Monday’s open.
DOVISH HOLD
The potential for market volatility and swings in the rand are likely to be another reason for policymakers to stay put, despite global moves towards easier monetary policy weighing in favour of a cut.
“We’re expecting ... a dovish hold, which means that rates remain unchanged after the rate cut that we saw in July but there is still a good chance that we will see another rate cut down the line,” Citigroup economist Gina Schoeman told Business Day TV.
“The reason we aren’t expecting a rate cut or any move is simply because they’ve already cut and we’ve got the October budget coming up, and there is so much currency risk involved in that depending on how it goes,” Schoeman said.
The rand firmed against the dollar on Wednesday ahead of the Federal Reserve’s interest rate cut. SA’s currency, one of the major determinants of the inflation outlook, has gained about 4.5% in the past month, as looser policy in developed markets boosted demand for higher-yielding assets.
Investec chief economist Annabel Bishop said she expects the tone of the MPC to be “decidedly more dovish” than before.
Risks in the next months include finance minister Tito Mboweni’s medium-term budget policy statement in October, and the ratings review by Moody’s Investors Service, which is scheduled for November, she said.
Stats SA retail sales numbers for July came in at 2% year on year, down from the previous 2.4%, reflecting that demand in the economy remains relatively subdued, while recent data showed business confidence at its weakest in more than two decades.
“Underlying conditions remain weak and patchy, weighed by both local and global factors,” said Nedbank economists, who are among the few expecting a cut on Thursday. “Inflation continues to be contained given exceptionally weak domestic demand conditions,” they said.
But PwC economists Lullu Krugel and Christie Viljoen said the MPC will reiterate its view that easier monetary policy is not a panacea for the country’s low economic growth.
Instead, the Bank will aim to maintain rate differentials that favour SA during a period of fiscal strain and increased government borrowing, they said.