Reserve Bank will likely hold off on rate cut, despite easing inflation - economists | Fin24
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Reserve Bank will likely hold off on rate cut, despite easing inflation - economists

Aug 21 2019 16:57
Lameez Omarjee with Bloomberg

Inflation for July eased to 4%, the lowest level since January. However, despite the latest figure being lower than market expectations, several economists have said the SA Reserve Bank (SARB) is likely to maintain a cautious stance before deciding to implement a rate cut, given the looming risk of a rating downgrade.

The Reserve Bank introduced a 25 basis points rate cut at the last Monetary Policy Committee (MPC) in July, bringing the repo rate to 6.5%. This was the first rate cut in more than a year, Fin24 previously reported. The next MPC meeting will be held in mid-September.

Statistics South Africa on Wednesday released the consumer inflation figures for July, which eased on the back of moderating food and transport costs. The latest figure, which is within the SARB's targeted range of between 3% and 6%, should be good news for the economy, according to Lukman Otunuga, senior research analyst at FXTM.

"Repeated signs of inflation moderating during the third and fourth quarter of 2019 should present the SARB an opportunity to re-join the global easing bandwagon, ultimately stimulating domestic consumption and economic growth.

When, not if 

"While the exact timings of the next SARB rate cut remain uncertain due the pending rating decision by Moody's in November, it now remains a matter or when rather than if," Otunuga said.

Investec economist Kamilla Kaplan shared similar views that the Reserve Bank would be taking into account rand depreciation and a sovereign credit downgrade when making a monetary policy decision.

"Inflation across most advanced and emerging market economies has softened as the oil price has receded from recent highs and growth in final demand has weakened.

"This has allowed for more accommodative monetary policy with central banks in most countries cutting interest rates," she commented.

Investec expects inflation to average at 4.6% this year, within the SARB's target range, Kaplan added.

PwC economists Lullu Krugel and Dr Christie Viljoen also expect the SARB not to make any changes to its lending rates in the next 12 months.

"Based on the central bank’s view on the (limited) value of reducing interest rates as a tool to stimulate the local economy, there is also no real possibility of seeing any interest rate changes," they said in a report they co-authored.

Positive impact

According to a Bloomberg report, a rate cut would be positive. Cristian Maggio, the head of emerging-market strategy at TD Securities in London, said a rate cut would help lower the cost of refinancing government debt and liabilities of state-owned enterprises.

Agricultural economist Wandile Sihlobo commented that the easing inflation figures could be because producers are absorbing rising costs.

"The food companies are finding it hard to pass through some of prices because of weak demand," he told Fin24 by phone on Wednesday.

The rand having opened at R15.36/$, edged lower to R15.24/$ following the announcement. But this is mainly on the back of expectations of the release of the US Federal Reserve meeting minutes, later on Wednesday, according to a market update from TreasuryONE.

inflation  |  fuel price  |  cpi


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