Drop in repo rate welcome news
Cut offers some relief to consumers soon to be hit by VAT, petrol increases
THE Reserve Bank delivered yesterday on South Africans’ hope for a cut in interest rates, announcing a reduction of 25 basis points in the repo rate, to 6.5%. The rate cut offers some relief to consumers‚ who will have to contend with an increase in the VAT rate to 15% from 14% on April 1.
South African motorists are also facing a petrol price increase next month of between 69c and 72c a litre‚ including the fuel levy and Road Accident Fund increases announced in the budget in February.
The diesel price will increase by 65c, it was announced yesterday.
The rate cut was neither a surprise nor a foregone conclusion‚ with Investec’s Annabel Bishop putting the odds at 50-50‚ and saying the market was pricing in a 40% chance of the cut.
Economic growth that came in better than expected in the fourth quarter‚ and Moody’s decision to leave South Africa’s credit rating one notch above junk and improve its outlook to stable‚ were among the factors in favour of a cut.
“The domestic growth outlook is more positive but still challenging‚” Reserve Bank governor Lesetja Kganyago said yesterday.
“Growth in the fourth quarter surprised significantly to the upside‚ and there are signs of increased business confidence.”
The bank’s monetary policy committee last cut rates in July – the first cut in five years and took the repo rate to 6.75%.
That cut came as a surprise‚ and led to hope it marked the start of an easing cycle‚ but an expected cut in September did not materialise.
Yesterday’s cut is not generally seen as a sign of further cuts to come.
The bank’s three-day meeting was held from Monday to Wednesday this time‚ instead of the usual Tuesday to Thursday‚ due to the Easter holiday weekend.
First National Bank chief economist Mamello Matikinca said before the meeting that any cut was unlikely to be a unanimous decision‚ as data in the latest Quarterly Bulletin raised concern about a potential wage price spiral that would concern the policy hawks on the monetary policy committee (MPC).
Another concern is the effect of the April 1 VAT increase on inflation.
Kganyago referred to this yesterday, saying: “While the increase in the value-added tax rate to 15% places temporary upside pressure on inflation‚ this is mitigated by the stronger exchange rate‚ which has contributed to the changing inflation risk profile.”
Inflation as measured by the consumer price index has been comfortably within the bank’s 3%-6% target band for the better part of a year‚ and slowed more than expected last month, coming in at 4%‚ from 4.4% in January and against forecasts of 4.2%.
“The rand has reacted positively to domestic political developments in the past months and was given further support following the recent sovereign credit rating announcement‚” Kganyago said.
Further support from the rand came from dollar weakness‚ he said.
The bank’s latest forecast is for inflation to average 4.9% this year – unchanged from the January forecast – 5.2% next year, from 5.4% forecast in January, and 5.1% in 2020.
“The MPC would like to see the inflation expectations anchored closer to the midpoint of the target band‚” Kganyago said.
The growth outlook for this year has also improved‚ with a forecast of 1.7%, from 1.4% forecast in January. But next year’s forecast dips to 1.5%‚ from 1.6% forecast in January; and growth of 2% is expected in 2020.
Growth for last year came in at 1.3%‚ beating the 1% forecast by the Treasury.
Slow growth‚ and a lack of policies to improve it‚ were among the concerns of rating agencies that downgraded South Africa to junk last year.
The reprieve granted by Moody’s on Friday‚ however‚ was followed by a reality check from S&P Global this week‚ which said South Africa was still growing too slowly to be lifted out of junk status. – BusinessLIVE