SA Reserve Bank not in a hurry to cut interest rates - analyst

Johannesburg – Although the South African Reserve Bank (Sarb) expects the inflation forecast to improve, it is not in a hurry to cut interest rates.

This is according to Professor Brian Khan, a Monetary Policy Committee (MPC) member at the Sarb. He met with Citi Research in London for an investor meeting, on Tuesday to share insights on the South African economy.

Among the issues discussed was the inflation outlook. According to David Lubin, managing director and head of emerging markets economics at Citi Research, Khan stated that food inflation would peak in the last quarter of 2016 and then improve for 2017 following better weather conditions.

Other reasons include the decline in oil prices and an appreciating exchange rate. “All this means the inflation rate could return to its 3-6% target range earlier than anticipated when the MPC met last month,” stated Lubin.  

However, the Sarb may not be cutting rates too quickly. “The Sarb doesn’t want to react to news that proves short-lived, and would rather preside over a smooth interest rate cycle,” he stated. The Sarb is looking out for “sustained improvement” in the inflationary outlook which would be enough for a drop in the medium term inflation forecast of 5.5%.

Economic outlook

South Africa’s macro policy environment is stable, and the Sarb is following discussions on labour reform.  The Sarb believes that National Treasury is taking a “steady” path through its fiscal tightening approach.

The possible introduction of a national minimum wage could help to moderate wage inflation. However the level at which a minimum wage is set will impact its economic effectiveness, stated Lubin.

The Sarb may also focus on reserves accumulation. South Africa’s reserves are “below where we would like to be”, stated Khan. And the International Monetary Fund judges South Africa to have a “low level” of reserves adequacy. The decision to accumulate reserves, which hasn’t been a priority in Sarb policy since 2011, would be taken by the Governor’s Executive Committee (GEC), stated Lubin.

Avoiding a credit downgrade at the end of the year will be difficult to achieve, the Sarb believes. Khan suggested that ratings agencies may not be “comfortable” with the potential of South Africa’s growth rate improving and if public debt dynamics are stable.