Softer inflation unlikely to move Bank

The slowdown in inflation towards the lower end of the Reserve Bank’s target range as consumers contend with a shrinking economy and uncertainty over incomes is unlikely to shift its stance to keep interest rates on hold, economists say.

Though the muted inflationary environment may weigh in favour of another cut in the repo rate from a record low of 3.5%, some economists believe the Bank is likely to be cautious about adding to a combined three percentage points of reductions in 2020, one of the most aggressive moves in emerging markets.

The Bank’s cuts as it sought to shield the economy from the Covid-19 outbreak and national lockdown have left the repo rate barely positive, after considering the impact of inflation.

Low rates reduce the appeal of holding the country’s assets, while a ballooning budget deficit has caused it to lose favour with bond investors.

Consumer price inflation slowed to 3.1% in August, data from Stats SA showed on Wednesday, down from 3.2% the month before.

PRECAUTIONS

The increase came as SA moved into level 2 of lockdown in midAugust, making more goods and services available for consumers. The monthly increase in prices was 0.2%, with the main contributor coming from transport after a rise in fuel prices.

Inflation has been at or below the midpoint of the Bank’s 3%6% target range for 21 months.

After breaching the lower level of the range in May and June, inflation picked up to 3.2% in July. The Bank forecasts inflation to average 3.3% in 2020 and 4% in 2021.

In another sign of subdued demand in the economy, data from the Bank on Wednesday showed that private sector credit growth slowed to an annual 3.9% in August 2020 as corporate and household credit growth slowed.

It is down from a 2020 peak of 7.7% before the Covid-19 pandemic hit SA and is at the weakest level since 2010, during the global financial crisis.

“The slowdown in household credit growth is reflective of depressed consumer confidence, weak income and employment prospects and a possible tendency towards precautionary savings,” Investec economist Kamilla Kaplan said in a note.

“Similarly, depressed business confidence, lower turnover in some industries and weak capital spending are constrain

ing corporate credit growth,” Kaplan said.

The Bank has nevertheless paused the aggressive rate-cutting cycle it launched to support the economy through the worst of the Covid-19 crisis, leaving the benchmark rate unchanged at its last meeting, a move that came despite a downgrade in its GDP forecast to a drop of more than 8% in 2020.

In an interview on Power 98.7 on Wednesday, governor Lesetja Kganyago said the Bank is ready to support the economy as needed. He again stressed the need for structural reforms to boost its competitiveness, Bloomberg reported.

Data from the latest quarterly labour force survey released on Tuesday showed that 2.2-million jobs were lost during the worst of SA’s hard lockdown.

A similar picture emerged from the National Income Dynamics Study: Coronavirus Rapid Mobile Survey on Wednesday. It showed that the almost 3.2-million jobs lost between February and April had not been recovered with the easing of lockdown restrictions.

Though it can be argued there is “some scope” for the Bank to cut another 25 basis points, it has already been “fairly aggressive”, Kevin Lings, chief economist at Stanlib, said in a note.

The pandemic-induced weakness, on top of three quarters of recession, has also been accompanied by changing consumer behaviour, said independent economist Elize Kruger.

This is evident in the Bank’s latest quarterly bulletin, which showed that household debt fell for the first time in two decades as households reduced their spending.

“A further cut in interest rates could assist households and corporates on the margin … but is unlikely to ignite the economy in a meaningful way,” she said.

HOUSEHOLD DEBT FELL FOR THE FIRST TIME IN TWO DECADES AS HOUSEHOLDS REDUCED SPENDING