Sarb expected to cut interest rate to stimulate growth
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
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
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
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
Sanlam Wealth’s director of investments, Alwyn van der Merwe, said a
lot of factors favoured a 25 basis point
“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.