SARB likely to hold off on rate cut

Johannesburg - After a tough month fighting off attacks on its mandate, the South African Reserve Bank (SARB) will revert to its day job of trying to fulfill it - probably by holding off on a rate cut.

Only three of the 23 economists surveyed by Bloomberg predict the SARB will cut the repurchase rate on Thursday from its current 7%, with the rest forecasting a more cautious approach from officials wary of switching the direction of policy too quickly. This meeting would make it the eighth straight meeting with no change in the benchmark.

The Monetary Policy Committee isn’t rushing to stoke monetary stimulus despite a technical recession and data on Wednesday that showed the weakest inflation for more than 1 1/2 years. That may provide a signal of the central bank’s determination to preserve its independence, fending off a revamp to its inflation-fighting mandate ordered by the Public Protector and described by Governor Lesetja Kganyago as “reckless”.

“If you just purely look from an economic template, then you may find a couple of points that can be ticked for a rate cut,” George Herman, the chief investment officer at Citadel Investment Services in Cape Town, said by phone. “Unfortunately I don’t think the MPC is ready.”

In June, the Public Protector instructed lawmakers to start a process to amend the constitution to make the Reserve Bank focus on the “socioeconomic well-being of the citizens” rather than inflation. This roiled markets, with the rand being the most volatile among major and emerging-market currencies this year, and the instruction was condemned by the ruling party and parliament.

The bank hasn’t touched its key rate since March last year. One of the central bank’s six-member MPC has voted for a cut at each of the last two meetings. Inflation has eased as food-price growth slows amid the country’s recovery from the worst drought in more than a century.

The lender projects that inflation will remain within the target band of 3% to 6% until at least the end of 2019.

The end of a rate-increase cycle doesn’t mean the start of cuts, Kganyago said in a May 4 interview.

Traders are pricing in a 25 basis-point rate cut by the end of the year, according to forward-rate agreements used to speculate on borrowing costs. The five-year breakeven rate, a measure of inflation expectations, is near a five-week low at 5.30%.

The rand weakened 0.2% to 12.9268 by 18:27 in Johannesburg Wednesday, paring its advance against the dollar this year to 6.3%.

“Should inflation continue on its trend to the downside and the domestic environment become a little more stable, the SARB is likely to loosen policy,” Halen Bothma, an economist at ETM Analytics, said in an emailed response to questions.

“The rand is likely to retain a measure of resilience,” which could likely translate to a cut as soon as September and almost certainly in November, he said.

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