Why SA has scope to cut interest rates | Fin24

Why SA has scope to cut interest rates

Jul 12 2017 20:18
Carin Smith

Cape Town - Lower than expected growth in the first quarter of 2017 and continued positive inflation surprises could have lowered the bar for interest rate cuts by the SA Rerserve Bank (SARB), according to Sanisha Packirisamy, economist at Momentum Investments.

"Momentum Investments, therefore, expects SARB to respond to an increase in real interest rates - likely to be brought about by a disinflationary trend in the near term - by cutting nominal interest rates by up to 50 basis points. This could, at the margin, alleviate pressure on indebted consumers," Packirisamy told Fin24 on Wednesday.  

"Previously the SARB suggested that the bar to interest rate hikes and cuts was still high. In the recent Monetary Policy Committee (MPC) statement, it was clear that we reached the end of the hiking cycle - given current conditions."

Packirisamy said since then, gross domestic product (GDP) has come out much weaker than initially envisaged and even though Momentum Investments does not think a rate cut will boost growth in a significant way, a rate cut could at the margin support growth.

"We believe confidence for both businesses and consumers remains depressed in light of policy uncertainty. Consumers who are indebted with products linked to prime - mostly upper-middle and high-income (earners) would pay less on debt and have more to spend," she said.

She explained that the argument about real interest rates is that real interest rates - therefore, nominal interest rates less inflation - averaged close to 3% on a long-term basis. This more or less reflected trend growth historically, she pointed out.

"However, trend growth has slipped below 2% - the SARB's trend growth assumption for the near term is closer to 1.3%, increasing over the next two years - implying that we do not need real interest rates to get to the old trend rate. As a rule of thumb, real GDP equates to real interest rates over time."

If one takes forward-looking inflation (one-year out), SA's real interest rates suggest there is scope to cut around 50 basis points, in her view.

"Currently, using the forward-looking inflation measure, SA has the fourth most attractive real interest rates on an emerging market comparison. In other words, carry trade still bodes well for inward portfolio flows to cover the current account deficit," she explained.

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