Rate cut could give economy much-needed confidence boost

Cape Town - Weak economic growth, heightened political uncertainty and potential fiscal fallout will make for a cautious decision by the Reserve Bank's monetary policy committee (MPC) on Thursday, according to Johann Els, senior economist at Old Mutual Investment Group.

Notwithstanding these risks, Els believes the South African Reserve Bank (SARB) will remain in a mild interest rate-cutting cycle.

“As is the consensus market view, we expect the SARB to cut the repo rate again this week by 25 basis points, bringing it down to 6.5%. We then expect a further two 25 basis-point cuts to occur in this cycle which implies a total of 100bps for this cycle,” he predicted.

“While SARB has little immediate impact on growth through its rate decision, a rate cut can assist in lifting confidence."

With the rand relatively strong, inflation heading lower and the economy in virtual stasis, the South African economy quite clearly needs a boost, according to Old Mutual Edge28 Fund co-manager Arthur Karas.

Karas expects the rate cut cycle to continue, and has positioned the fund for rate cuts for some time, with increased holdings in SA bonds, SA-listed property, SA banks and credit sensitive retailers while reducing cash exposure.

He however adds that the main concern for markets is not high interest rates, but rather the issue of confidence.

Els added that a rate cut on its own won’t impact markets, but it will certainly help in supporting both consumer and business confidence – something the SA economy is in need of.

For Sanisha Packirisamy of Momentum Investments, SARB's medium-term headline and core inflation trajectories allow for a window of opportunity to cut interest rates by 25 basis points on Thursday.

"If there are no prolonged negative currency adjustments following the credit rating agencies’ updates and ruling party’s elective conference in December 2017, the SARB is likely to cut interest rates by an additional 25 basis points before the end of the first quarter of 2018," she said.

"In the absence of increased certainty around the direction of economic policy, monetary policy alone is unlikely to solve the country’s low growth problem. However, easier monetary policy will provide some relief to highly-indebted households, albeit at the margin."

Inflation up but not too much

Earlier on Wednesday Fin24 reported that consumer inflation has gone up, but slightly below market expectations, following increases in the fuel price.

The consumer price index (CPI) is still within the Reserve Bank's 3% to 6% target band, TreasuryOne said after the CPI release. "There is a good chance the SARB may look to cut interest rates tomorrow by another 25 basis points."

The USD/ZAR was trading at high as R13.40/$ on Thursday morning ahead of the rates announcement. By 10:53 the local unit was trading at 0.19% weaker against the greenback at R13.35 from its previous overnight close of R13.32. 

Els expects the MPC to lower its own inflation forecast further to end 2017 at 4.5%, possibly even drifting slightly lower into early 2018.

"Inflation is expected to move largely sideways through 2018 to end the year at 4.7%, thus, from an average inflation of 6.8% in 2016, to an expected 5.3% in 2017 and 4.7% in 2018,” said Els.

The breakdown of the CPI basket suggests inflation in more than 80% of the items (on a weighted basis) is comfortably below the upper end of the 3% to 6% inflation target range, according to Packirisamy.

She pointed out that this is the highest on record since the implementation of the new basket in 2009, before which a meaningful comparison is difficult to make.

Economy still in a slow growth trap
Regarding gross domestic product (GDP) growth, Els said SARB will look through the rebound figures of the second quarter, as underlying growth is still weak.

“While the economy remains in a slow growth trap, especially compared to the performance in the rest of the world, we anticipate a mild improvement from 2016, when growth totalled 0.3%, and expect 0.8% growth this year,” said Els.

Els added that uncertainty surrounding the country’s pending investment grade decision and the upcoming ANC elective conference in December is holding economic growth back this year.

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