Further interest rate cut plausible - economist

Cape Town - A further interest rate cut of 25 basis points by the South African Reserve Bank (SARB) is plausible by the second half of 2018, according to Sanisha Packirisamy, economist at Momentum Investments.

However, she adds that this would likely require inflation expectations to shift closer to the mid-point of the SARB's inflation target.

Despite the expectation of a mildly depreciating rand and rising inflation trend, Momentum Investments expects inflation to remain well within this target band in 2018 and 2019.

At the same time, she points out that the new administration under President Cyril Ramaphosa will require time to improve economic growth and stabilise the fiscal position, given the country’s structural weaknesses. Momentum Investments still forecasts trend growth at around 2%.
The fragile financial state of many parastatals, however, poses a material risk to government’s balance sheet, cautions Packirisamy.

At the same time, trade frictions and the potential for a faster pace of monetary policy tightening in developed markets pose downside risks to the economic recovery under way in emerging markets, she added.

She is of the view that a closing output gap and rising inflation should allow for additional interest rate hikes to beyond a neutral monetary policy stance in upcoming quarters in the US.

At the same time, monetary policy is expected to remain expansionary in the eurozone. Packirisamy adds that it is, however, expected to gradually shift away from an easing bias, in response to firm growth and a modest uptick in inflation.


As for markets, she says there are currently only a few signs of the imminence of a global equity bear market.

In her view, a shift from a so-called Goldilocks environment of strong growth and low inflation to one of reflation (strong growth and rising inflation) during the last phase of the equity bull market will likely be less positive for equities, and rather correspond with higher volatility.

Global hunt for yield 

"The global hunt for yield continues to underpin emerging market debt markets, but with South African inflation bottoming, there should be limited further inflation support for the SA bond market during the remainder of 2018," she said in a market and economic outlook released on Tuesday.

"The combination of a large Ramaphosa-driven bond market rally since November last year and the big Resilient-driven property sector sell-off since then has caused the SA listed property sector to now trade at the cheapest relative rating to local bonds in five years."

She believes the expected positive "Ramaphoria" effect on corporate sales and margins should support the profit growth of domestically orientated companies in South Africa, while expected moderate rand weakness should enhance globally generated profits.

"Although globalisation and the 'Naspers effect' have caused the overall SA equity market to trade in line with elevated developed market valuations, the median SA share trades in line with more attractive EM valuations, providing investors with better return prospects," she said.

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