Experts weigh in on further likely SARB rate cuts, hikes

Cape Town - In announcing a 25 basis points cut in the repo rate on Wednesday, the SA Reserve Bank (SARB) indicated that the risks to the inflation outlook have somewhat subsided, commented Tumisho Grater, economic strategist at Novare.

She said the SARB’s quarterly projection model (QPM) - which shows the implied path of policy rates generated by the central bank - has changed since the last MPC meeting in January this year.

Two to three increases of 25 basis points each were indicated before, but now the QPM implies only one increase of 25 basis points by the end of next year.

"Like other emerging markets, South Africa has been a beneficiary of the supportive global economic backdrop coupled with the dollar weakness which has been a source of support for the rand. Nevertheless, there are still several unknown variables which could be a source of risk to the inflation outlook," said Grater.

Nedbank saw the MPC as making a dovish statement relative to recent ones.

"This was not surprising taking into account better than expected economic indicators and political developments since the start of this year," the bank's economic unit commented.

"This could have suggested further rate cuts later this year. However, the projected guidance on interest rates points to a resumption of a rising cycle, although the trajectory will be more moderate."

Additionally, Nedbank feels SARB’s inflation forecasts seem to underestimate the effect of the VAT increase, so the outcome could be slightly higher and restrict chances of further cuts. The bank, therefore, thinks the MPC will maintain an unchanged policy interest rate for the rest of the year before a mild hiking cycle commences in the second half of 2019.

Jacques du Toit, property analyst at Absa Home Loans, said the latest cut in lending rates came against the background of the MPC’s expectation that the headline consumer price inflation rate will on average remain within the inflation target range of 3% to 6% in 2018 to 2020, while inflation has been edging lower since early 2017 on the back of base effects driving food price inflation (15.48% weight in the headline index) lower.

He expects future interest rate movements will remain largely dependent on trends in relevant key economic and financial market data, with the SARB forecasting the repo rate to rise to 7.5% per annum by end-2020.

Investec also commented on the outputs from the MPC’s Quarterly Projection Model having changed.

"While previously two or three increases of 25bp each by the end of 2019 were indicated, one increase of 25 basis points is now implied, with two further lifts projected for 2020," Investec said.

FNB CEO Jacques Celliers said the rate cut will further boost consumer and business confidence, both of which have been recovering well in recent months.

In his view, this is an ideal time for consumers to exploit lower interest rates and reduce their overall debt levels.

FNB chief economist Mamello Matikinca said the SARB’s decision to cut the repo rate comes as very little surprise given the positive events that have unfolded in SA recently.

Downgrade risk has subsided following Moody’s credit assessment, and the rand has reacted positively to this outcome. As such, the short-term rand exchange rate has become less of a risk. In his view, this should offset the negative impact of the recent rise of the oil price on inflation.

FNB expects inflation to remain within SARB’s target range. The bank said while it is difficult to see the SARB entering a cycle of sustained rate cuts due to climbing interest rates in the US as well as the emergence of severe volatility in stock markets and international trade, a lower interest rate will lift the SA economy by reducing the cost of loans.

Luigi Marinus, portfolio manager at PPS Investments, said it is worth noting that this rate cut contradicts the most recent move by the US Federal Reserve to hike rates by 25 basis points.

"Investors view the rate cut as ‘growth positive’ for the SA economy that has experienced disappointing GDP growth in recent years. The significant progress made within SA in this quarter bodes well for promising economic growth prospects," he said.

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