The looming risk of a Moody’s downgrade could push South Africa’s risk premium higher, leaving the Sarb reluctant to cut the repo rate. Photo: Supplied

JOHANNESBURG – Low inflation is set to benefit consumers this festive season as the South African Reserve Bank (Sarb) looks set to leave interest rates unchanged at its final meeting for the year tomorrow.

Statistics South Africa will today release the Consumer Price Index (CPI) for October, which is expected to have cooled at 4 percent year-on-year.

Inflation was 4.1 percent year-on-year in September, from 4.3 percent in August, dipping below the 4.5 percent midpoint of the Sarb’s target range of 3 to 6 percent.

Economists say the Sarb’s Monetary Policy Committee (MPC) is likely to cut the repurchase rate (repo rate), or at least leave it unchanged, as inflation has consistently surprised on the downside this year. Sarb cut the repo rate by 25 basis points in July, from 6.75 percent to 6.5 percent, and decided to keep it unchanged in September.

But that has not spurred economic growth, as retail sales continue to depict a muted demand environment, moderating to 1.1 percent in August and falling below the market consensus of 1.7 percent.

FNB strategist for commercial property finance, John Loos, said the expectation was of a more pronounced slowdown in the October inflation print to below 4 percent, largely due to a marked downturn in the petrol price and a relatively high 2018 base. 

Loos said weak domestic demand should keep core inflationary pressures muted.

“In the currently low CPI inflation environment, (we) expect the Reserve Bank to cut interest rates by 25 basis points,” Loos said. “We believe that current property market-related sentiment is driven less by interest rate moves and prospects at present and more by economic performance and perceived future economic growth and stability prospects.”

A 25-basis point cut would lower the repo rate to 6.25 percent and the prime lending rate to 9.75 percent.

Senior research analyst at FXTM, Lukman Otunuga, said the inflation figures for October may shape monetary policy expectations for 2020. 

Otununga said the Sarb may err on the side of caution and opt to keep the repo rate on hold, despite concerns of fiscal deterioration and the implications this has on the sovereign credit rating.

But fiscal deterioration and the looming risk of a Moody’s downgrade could push South Africa’s risk premium higher, leaving the Sarb reluctant to cut the repo rate.

“The central bank is widely expected to leave interest rates unchanged at 6.5 percent, despite lingering fears of a credit downgrade by Moody’s and fragile economic conditions weighed by external risks,” Otunuga said.

“Should the Sarb adopt a cautious stance and express concerns over the South African economy, the rand will be thrown in the direct firing line.”