Scope for rate cuts closing

Johannesburg – The Reserve Bank may keep rates on hold in November as it waits for event risks to play out before making a decision on further cuts, says an economist.

According to FNB senior economic analyst Jason Muscat, the scope for the South African Reserve Bank (SARB) to cut rates is diminishing. It will be keeping a watch of the mini budget announcement next week, rating agency assessments, the Eskom tariff application and the ANC elective conference.

“We think it is likely that the bank will wait to let much of the event risk play out before moving on rates,” he said. Rather than lowering rates in November and having to reverse that decision when the outcomes of these events stoke fears of higher inflation, he explained.

On Wednesday Statistics South Africa (StatsSA) reported a rise in inflation by 0.5% between August and September.

September’s annual inflation increased to 5.1% from 4.8% reported in August.

The increase was in line with market expectations, following the 67c/l increase in fuel prices in September, said Muscat. “Overall, weak economic growth, low consumer and business confidence and stretched consumers mean there is simply not enough demand to spur inflation higher,” he said.

Investec economist Kamilla Kaplan is also of the view that inflation may be on a downward trend for the remainder of the year. Pressure from fuel prices may subside as the Department of Energy (DoE) estimates a price increase of 1.4c/l in October.

Food and non-alcoholic beverage inflation moderated to 5.4%, bread and cereal prices contracted by 2.8%, while meat prices increased 15.6%. “The outbreak of avian flu could push out the peak by a few months,” said Muscat.

Poultry producers previously warned that the shortage in supply of birds. FNB senior agricultural economist Paul Makube previously explained that the cost of chicken will increase as producers have to carry higher costs.

Momentum Investments economist Sanisha Packirisamy is of the view that a recovering global economy, an improving inflation trajectory, a shift to lower inflation expectations and muted domestic confidence still justify further rate cuts. Momentum Investments expect two interest rate cuts of 25bps each before the end of the first quarter in 2018.

Packirisamy however added that the timing of monetary policy easing depends on event risks. 

Old Mutual Investment Group’s (OMIG) head of economic research Johann Els said that if the rand remains stable and if inflation remains within the 3% to 6% target band then two or three further rate cuts in 2018 are possible.

OMIG also expects inflation to continue to fall, reaching close to 4% early in 2018.

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