Repo rate predicted to stay unchanged
JOHANNESBURG - The South African Reserve Bank (Sarb) is set to announce the first repo rate decision for the year on Thursday with economists predicting that the rate will remain unchanged.
FNB said on Friday that Sarb was likely to err on the side of caution
“At their last Monetary Policy Committee (MPC) meeting the Sarb decided to keep the repo rate unchanged at 6.5percent, leaving the prime lending rate at 10 percent. Regarding next week’s decision, we assess the odds for a rate cut to have risen.
"Since the last MPC meeting, the rand exchange rate has strengthened, while growth and inflation have surprised to the downside.” It said the Sarb was likely to err on the side of caution and keep rates unchanged, given domestic event risks, including the upcoming February 2020 budget and Moody’s ratings decision as well as renewed risks on the global front.
Investec chief economist Annabel Bishop said on Friday that South Africa was at risk of seeing an even lower economic growth rate this year as a number of structural problems remained unresolved.
“2020 would see further contraction in government fixed investment if projects budgeted for do not go ahead, while this is also an area that risks budget cuts as government seeks to reduce expenditure to avoid a Moody’s credit rating downgrade,” Bishop said.
“Consumer price inflation dropped in 2019's fourth quarter first two monthly readings, to below 4percent year-on-year, which will have a negative impact on real disposable income growth in that quarter.
"Bank lending conditions remain relatively tight, and consumers in South Africa are relatively financially constrained.”
She said South Africa’s growth had been impacted by policy uncertainty domestically and the failure to implement the structural reforms needed this decade. The rand will continue to be volatile, driven by global events, and structurally weakened by SA’s poor fundamentals.
"A 25 basis point interest rate cut would become increasingly likely in the second quarter, if South Africa’s Moody’s rating outlook returned to stable", she said.
Economist have warned that South Africa may face a bleak outlook this year if reforms are not implemented urgently.
The economy contracted by 0.6percent in the third quarter of 2019.
The country’s gross domestic product (GDP) projections for 2019 have been lowered further in recent months, with estimates by the International Monetary Fund, National Treasury and the Sarb ranging between 0.5 and 0.7 percent, all below the 0.8percent achieved in 2018.
The World Bank last week cut its growth forecast for South Africa to 0.9percent year-on-year for 2020, from 1.5percent forecast previously.
Economists say the country’s slow reform agenda, including Eskom’s power cuts, will put the economic growth prospects in the line of fire against credit ratings agencies.
Senior research analyst at FXTM, Lukman Otunuga, said the third quarter contraction would bite on sentiment that full-year growth is at threat to being dramatically lower than the 0.5 percent for 2019 that was projected by the Treasury in October.
“All eyes will be on the 2020 budget statement in February which will be viewed as critical towards helping the economy. Given how inflation in South Africa has dropped to the lowest level in almost 9 years, a great level of attention will be on Sarb to increase monetary action to jump-start the local economy.
“However, this is only part of the equation. The other answer to the equation is that the government needs to pursue economic reforms and fiscal policy to drive the economy.”
Head of capital markets research at Intellidex, Peter Attard Montalto, said they do not think that the pace of reform and clean-up was fast enough to actually move forwards, let alone run to stand still and as such boost business confidence.
“To be clear the narrative is the same - negative per capita income growth and an economy that simply is failing to accumulate investment, total factor productivity growth or absorb labour.
"Yet equally deep inequality keeps an ‘elite’ economy ticking over at the margin together with positive real wage and positive real credit growth rates and a weak rand,” Montalto said.
“There is, however, no panic in the wider government, outside of the National Treasury, over this.
"This is telling, and reinforces the low growth forecast. We do not see shifting lower GDP expectations increasing the probability of reforms occurring fast enough to boost sentiment.”