Share

Why SARB could cut rates again soon - economist

Cape Town - The SA Reserve Bank (SARB) will likely cut interest rates further by at least an additional 25 basis points in the near future if inflation continues to track lower in line with expectations and remain well within the target band for the foreseeable future.

This is the view expressed by Sanisha Packirisamy (economist) and Herman van Papendorp (head of investment research and asset allocation) of Momentum Investments on Tuesday.

They point out that the recent SARB interest rate reduction of 25 basis points was not in line with a Reuters consensus poll in which 24 out of the 27 analysts surveyed predicted the SA repo rate would remain steady at 7%.

The SARB noted a significant move lower in its inflation forecasts for this year and next. It now expects headline inflation to average 5.3% in 2017 (previously 5.7%) and 4.9% in 2018 (previously 5.3%).

According to Van Papendorp and Packirisamy, these revised forecasts relative to the May 2017 rate-setting meeting have moved closer in line to Momentum Investments’ view, although the company sees notable upside risks to the SARB’s 2019 forecast of 5.2%.

READ: Surprise cut in SA interest rates, rand hit

"A lower base on inflation, a downward adjustment to international oil price assumptions, lower domestic electricity tariffs, a wider output gap and an adjustment to the real effective exchange rate were noted as key reasons underlining the downward revision in inflation assumptions," said Packirisamy.

"The SARB clearly stated the move to cut interest rates by 25 basis points to 6.75% was made in reaction to its improved outlook on inflation and in response to the deteriorated view on domestic growth."

Momentum Investments agrees with the SARB’s sentiments that SA’s growth problems are not cyclical in nature, but are tied to the elevated level of policy uncertainty, which has been extremely damaging to consumer and business confidence. Nevertheless, easier monetary policy should, at the margin, help indebted households, Van Papendorp and Packirisamy pointed out.

Momentum Investments still expects the current interest rate cutting cycle to be comparatively shallow relative to previous cycles, given the lingering risk of further ratings downgrades (which could negatively affect the rand and inflation expectations); ongoing political uncertainty; potential negative swings in emerging market sentiment; and uncomfortably high domestic inflation expectations.

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.2%
Rand - Pound
23.90
-0.0%
Rand - Euro
20.43
+0.2%
Rand - Aus dollar
12.34
+0.1%
Rand - Yen
0.13
-0.1%
Platinum
907.85
+1.2%
Palladium
1,012.25
+1.1%
Gold
2,221.12
+1.2%
Silver
24.86
+0.9%
Brent Crude
86.09
-0.2%
Top 40
68,346
+1.0%
All Share
74,536
+0.8%
Resource 10
57,251
+2.8%
Industrial 25
103,936
+0.6%
Financial 15
16,502
-0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders