Why SA won't see interest rate cuts soon

Johannesburg – With low growth and the expectation of higher inflation, the South African Reserve Bank (Sarb) is likely to keep the repo rate unchanged at its next Monetary Policy Committee (MPC) meeting next week, said an analyst.

In a statement Nomura emerging markets economist Peter Attard Montalto explained that it is likely that interest rates are to remain unchanged. However, the Sarb may be “hawkish” following the inauguration of US President-elect Donald Trump.

At the last MPC meeting in November, Reserve Bank Governor Lesetja Kganyago highlighted the concerns of a stronger dollar and the impact of interest rate hikes by the Federal Reserve Bank (Fed).

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The stability of the rand suggests that the market may expect a rate cut soon. However Montalto cautioned that this stability may be undone if the rand weakens in the medium term.

Montalto said risks remain regarding rising oil prices and possibly taxes. “This is what prevents cuts,” he said.

Nomura views inflation to be 5.7% by the fourth quarter of 2018, the Sarb’s forecast is 5.6%. “We think the Sarb cannot cut rates as long as this long-run forecast is not on a path towards 4.5% and certainly as long as it is above 5.0%.”

“We think conditions will not exist to cut rates in the next two years, and also the MPC framework will remain broadly sticky and not see room to cut,” added Montalto.

He reiterated that rising oil prices, a stronger dollar, downgrade risk, more Fed rate hikes and a loosening fiscal policy by the US may be viewed as key risks by the MPC.  

Montalto added that they may not be “major shifts” to inflation and growth projections by the Sarb.