Sarb expected to cut interest rate to stimulate growth

By KABELO KHUMALO AND BANELE GININDZA Time of article published Jul 17, 2019

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JOHANNESBURG – South Africa is gearing up for a

possible interest rate cut tomorrow,

as moderating inflation pushes for

a rate respite to inject cash into the

struggling economy. 

The monetary policy committee

(MPC) of the SA Reserve Bank (Sarb)

is widely expected to cut interest rates

by at least 25 basis points for the first

time since March 2018 on weak economic growth, subdued inflation and

the dovish global monetary climate. 

Inflation rose to 4.5 percent in

May from 4.4 percent in the prior

month, but still in the mid-point

of the Sarb’s target range of 3 to

6 percent.

Bank of America Merrill Lynch

said its researchers had pencilled in

the 25 basis point cut to be followed

by two cuts in September and January. 

“The rand stands to benefit disproportionately from risk-in emerging

markets (EMs). Real 10-year yields

based on core inflation is 5 percent,

the highest since 2011 and substantially above many major EM peers,”

Merrill Lynch said. 

The May consumer price data

marked the sixth consecutive month

that year-on-year inflation settled

below the midpoint of the central

bank’s target band.

It last breached the top end of the

range in March 2017. 

The economy plunged 3.2 percent

in the first quarter, while the government’s fiscal position has worsened

since the start of the year.

Tumisho Grater, economic strategist at Novare, said the dovish tilt by

global central banks, most notably

the US Federal Reserve, had given

the MPC some breathing room to cut

interest rates.

Grater said the expected rates ease

would be a close call.

“Should the fiscal situation worsen

significantly, this could have major

implications for inflation expectations, not to mention the fact that

this would increase the risk of a sovereign credit rating downgrade by

Moody’s,” Grater said. 

“This may be

one of the factors that could cause

the Sarb to be reluctant to cut interest

rates before there is some stabilisation

or turnaround plan for government


The MPC last month kept the

benchmark repo rate unchanged at

6.75 percent in a narrow three-to-two

vote and said it expected headline

inflation to average 4.5 percent in

2019, down from 4.8 percent.

Rating agency Moody’s said with

inflation well contained it expected

the bank to cut the policy rate in the

upcoming meetings.

Sanlam Wealth’s director of investments, Alwyn van der Merwe, said a

lot of factors favoured a 25 basis point

cut tomorrow. 

“There was noise about whether

the Reserve Bank should consider economic activity, what with the 3.2 percent cut in growth in the first quarter,

but I do not think it is a primary

objective to take economic growth or

the lack thereof into consideration in

making this decision,” he said.

NKC Africa Economics forecast an

economic contraction in 2019 with

real GDP growth at -0.2 percent versus

the forecast of 0.8 percent at the time

of the previous MPC meeting in May. 

“With the conservative nature of

the current MPC, it is unlikely that

a larger cut will realise, though a

50-basis point cut could be fully justified in the current economic conditions,” NKC said. 


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