CAPE TOWN – The SA Reserve Bank's Monetary Policy Committee (MPC) should lower interest rates tomorrow.
Not only was the inflation rate since the last meeting lower than its “unofficial” target of 4.5 percent, namely 4 percent and 4.3 percent respectively, but the average rate over the last eight months is 4.27 percent.
This is according to Chris Harmse, chief economist at Rebalance Fund Managers, who said all the risks factors that they would take into consideration pointed towards another cut.
"The changes in administered prices are mostly already included as the annual increase in electricity rates were included in the July figure. Although changes in wages are still in a negotiation phase one cannot expect that wages increase will be much higher than last year.
"Concerning the exchange rate, the rand did depreciate since the previous meeting from levels around R14.10 a dollar to as high as R15.40 a dollar at the end of August, just to start to move stronger over the last two weeks to its current level of around R14.63 a dollar. The risk on the exchange rate is getting smaller as it is expected that the Rand is likely to improve, especially if the Fed also cut rates and a negotiated a trade war settlement,” said Harmse.
The other factors of risk for an increase in inflation expectations are also subsiding. The growth in the money supply came down from 9 percent in July to 8.2 percent in August, whilst the credit extension from the Banks to the public had increased only marginally from 6.9 percent to 7.2 percent.
Harmse said the biggest risks that caused some panic over the last few days are the increase in world oil prices.
The attack on the Saudi oil installations had sent arguably negative sentiments into the world that the global economy is about to incur an oil price shock.
For South Africa, a lot of the press and even economist and market analysts started to argued that a spiral and strong increase in fuel prices were on the cards.
In this regard, many feel that the risk of cutting the repo rate now was too high.
Once again one must carefully analyse these arguments. The inflation rate is calculated monthly by looking at the basket of prices in relation to a year ago (annual change).
In October last year, the price of petrol had shot up by 100 cents from R16.08 per litre in September to R17.08 at the beginning of October. This is already 105 cents per litre than the current price or more than 6 percent. The same applies to the price of Diesel that had increased by also 105 cents to R15 .64 in October 2018.
This is also 105 cents higher than the current price or 6.7 percent.
According to the latest data from the Central Energy Fund, the price of petrol was only 2 cents under recovered on Tuesday 17 September and that for Diesel by 17 cents.
Since then both the exchange rate as well as the oil price already had recovered. It seems that a risk of a sharp increase in the inflation rate due to this “once-off” spike in the oil price is only speculation and most unlikely
IF the MPC applies his risk factor evaluation it seems that inflation expectations for the rest of the year are rather on the low side.
At the same time, Absa's Purchaser Managers Index slumped to 45.7 in August 2019 from 52.1 in the previous month.
The SA Chamber of Commerce and Industry business confidence index also had deteriorated even further to 89.1 in August 2019, its lowest level since August 1985, from 92.0 in the previous month.
This also points towards the need for the MPC to cut rates sooner than later.