Economists welcome SARB decision on rates

Johannesburg - The South African Reserve Bank has indicated that an improved inflation outlook coupled with positive economic data could bring an end to rate hikes.

Governor Lesetja Kganyago said yesterday that the situation had allowed the bank to “pause for longer” - signalling the end of the tightening cycle.

Kganyago said the bank’s monetary policy committee (MPC) unanimously decided to keep lending rates unchanged at 7 percent a year in line with market expectations. “The MPC is of the view that should current forecasts transpire, we may be close to the end of the tightening cycle.”

The decision comes in the wake of the 3.3 percent quarter-on-quarter gross domestic product (GDP) growth reported in this year’s second quarter; the narrowing of the current account deficit to 3.1 percent; and the levelling of inflation below previous forecasts.

Inflation expectations have declined 0.2 percent to 6 percent for next year and have remained unchanged at 5.9 percent for 2018. The rand has also strengthened against the US dollar this year.

Bank’s attitude

However, Kganyago warned that there were a number of factors that could influence the bank’s attitude, including the rand being vulnerable to domestic and external shocks and food prices expected to peak in the final quarter of this year.

“The committee is aware that a number of the favourable factors that have contributed to the improved outlook can change very quickly resulting in a re-assessment of this view,” Kganyago added.

Kganyago noted that longer-term inflation expectations remained at the upper end of the target range of between 3 to 6 percent, with high wage settlement rates and inflation expectations contributing to the persistence.

The bank also revised its economic growth forecast for this year from 0 percent to 0.4 percent and said prospects for the next two years would increase by 0.1 percentage points to between 1.2 percent and 1.6 percent respectively.

Economists yesterday welcomed the decision to keep interest rates unchanged.

Old Mutual Investment Group’s Rian le Roux said they expected inflation to average just under 5.5 percent next year. “The state of the economy will obviously also influence (the Reserve Bank’s) decisions in 2017,” he said.

Le Roux said the 7 percent inflation peak in February was not likely to return. “We think the rate hike cycle is done, barring a few scenarios.”

Sanlam Investments economist Arthur Kamp said there were lingering concerns over possible shocks that could still cause an upset.

He said uncertainty around the likely pace and timing of US interest rate hikes and lingering domestic economic policy uncertainty could influence the next move by the Reserve Bank. “The worry is that a renewed bout of rand weakness could re-ignite inflation expectations and ultimately lift inflation.”

Nomura development economist Peter Attard Montalto said the bank’s dovish tone suggested that the 25 basis point hike previously pencilled in for November could be pushed out to next year.

“We again highlight our layered forecast of no more hikes if (the rand) remains around current levels, but we still think there would be more hikes if (the rand) were to sell off to around 15.50 or higher in USDZAR and core inflation were to surprise to the upside,” Montalto said.

NKC Research analyst Hanns Spangenberg said while there were expectations that the Reserve Bank could hike interest rates, the latest data - particularly headline inflation last month - provided the central bank with the necessary leeway to not hike rates.

He said base effects could see consumer price index inflation rise with additional upward risk stemming from depreciation of the rand and the possibility of a recovery in oil prices.

The worry is that a renewed bout of rand weakness could re-ignite inflation expectations.