SARB should guide markets rather than surprise them - economist

Johannesburg – The Reserve Bank should guide markets with its rate decisions, rather than surprise them as it has historically done, according to an economist.

At the Old Mutual Investment Group’s (OMIG) quarterly investment briefing on Wednesday, head of economic research Johann Els shared expectations for future rate decisions.

The South African Reserve Bank's (SARB's) recently-released monetary policy review showed the bank is taking a more hawkish stance as it wants the real repo rate to be at 1.5%, said Els. The bank forecasts inflation at 3.5% with no more room for rate cuts.

But OMIG expects two or three further rate cuts in 2018, if the rand remains stable and if inflation remains within the 3% to 6% target range.

“We are disappointed by the Reserve Bank’s recent lack of clear communication with markets, having chosen to surprise the markets both in July and September.” This approach is different to global central banks, which have tried to guide markets instead of surprise them.

Inflation expectations

OMIG expects inflation to continue to fall, reaching close to 4% early in 2018. This is below the 4.5% midpoint of the SARB’s target range.

Food inflation is expected to be lower, as meat inflation appears to have reached the peak of its inflation.

Mini budget expectations

Els also shared expectations of the medium-term budget policy statement (mini budget) on October 25.

So far, revenue collection for the first two months of the fiscal year has been below the budget line. Both individual income tax and VAT have been below target. But history shows in the last six months of the fiscal year, revenue tends to pick up, Els explained.

In terms of the mini budget outlook, OMIG expects the current account deficit to be 4% of GDP and possibly a revenue shortfall of R50bn.

“The reason why tax revenue is below target is because the economy is weaker.” This means the deficit will overrun because of a shortfall in terms of tax revenue, he explained.

This will add “huge pressure” on ratings agency decisions and the February budget for additional revenue measures, he said.

Els warned that South Africa could fall into a debt trap if growth does not improve by at least 2%. “The debt-to-GDP ratio will improve if we continue to grow.”

“We need to sort out economic policy to get GDP growth back on track to 2%,” said Els. He also commented that this is below the 5% target of the National Development Plan, but efforts must be made to get away from 0% growth. 

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