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SARB seen keeping rates steady

Johannesburg – Economists are of the view that the Reserve Bank will likely hold off introducing rate cuts at the monetary policy committee's interest rate announcement on Thursday.

Although inflation remained within the target band, having eased to 5.1% from 5.4% reported in May, the South African Reserve Bank (SARB) will still be cautious given political and other macro-economic risks to the currency.

READ: Inflation falls for third month in a row

Momentum Investment economist Sanisha Packirisamy explained that the SARB may have leeway to introduce a 50 basis-point cut, given lower inflation coupled with low economic growth. However, interest rate cuts may be deferred due to rand risks which continue to provide “an upside threat” to inflation.

Inflation expectations are still “uncomfortably anchored” at the top end of the inflation target band, she said.

Investec economist Kamilla Kaplan said that the SARB’s 18- to 24-month inflation forecast would have to decrease towards the mid range of the 3% to 6% target band before considering policy easing.

Investec expects the SARB to lower its inflation forecast to 5.7% for 2017, 5.3% for 2018 and 5.5% in 2019.

Investec chief economist Annabel Bishop explained that the inflation forecast is too close to the upper end of the target for the SARB to consider a rate cut.

“While the SARB has communicated that the rate hike cycle is likely at an end, it has not yet come out in favour of interest rate cuts,” said Bishop. However, the bank is expected to take a dovish tone for the second half of the year.

'Politics won't push SARB into rate cutting cycle'

“The SARB is unlikely to be pushed into a rate cutting cycle by South African politics, and has instead been following a careful path, which is unlikely to change materially,” she said.

Kevin Lings, chief economist at Stanlib, said that inflation has averaged at 5.8% for the first six months of the year. During 2014, inflation averaged at 6.1%, compared to 4.6% in 2015. This moved “significantly higher” to 6.3% during 2016 because of the drought, he explained.

Stanlib expects inflation to average at 5.5% for 2017, driven by a moderation in food inflation and a lower fuel price. “It is worth noting that SA inflation could fall to below 5% next month and will most likely test the mid-point of the inflation target in early 2018 before stabilising at around 5.5% in the second half of 2018,” he said.

The rate hikes in 2015 were a response to inflationary pressure and the effect of the US Federal Reserve's possible interest rate increase on South Africa’s foreign capital flows, explained Lings.

In the light of the technical recession and lower inflation, Lings said the Reserve Bank is expected to introduce rate cuts, but South Africa still remains vulnerable to investor sentiment. This has been elevated with the recent credit downgrades and expectation that the Fed would continue to normalise rates.

“Under these circumstances, while the Reserve Bank is now expected to cut interest rates the extent of the reduction is likely to be relatively modest,” said Lings.

“Ultimately, the bank has to balance the current lower growth or lower inflation data against the risks associated with South Africa’s increased vulnerability to changes in foreign capital flows.”

Stanlib still expects the Reserve Bank to introduce two rate cuts of 25 basis points over the next six to nine months.

Citibank economist Gina Schoeman added that the inflation data may not have a bearing on the MPC’s decision. “We do expect the MPC to present a dovish statement with more than just one MPC member (as in May) voting for a rate cut. The number of MPC members voting for a rate cut will determine how early a cutting cycle could commence, in our view.”

Schoeman said that when rate cuts are introduced, they should not be considered an answer to stimulating economic growth.

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