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JOHANNESBURG - The MPC decided not lower interest rates by cutting interest rates. The reasons are not clear and a bit confused and contradict each other. 

The MPC has indicated that inflation forecast generated by the Banks Quarterly Projection Model (QPM) shows that headline inflation is likely to average 4.2% in 2019. 

This is well down from the previous forecast of 4.4%. The forecast for core inflation is also down to 4.3% from the previous 4.4%. 

This is well below the so-called mid- point inflation target of 4.5% as is seen by the Reserve Bank as an “unofficial” target. The MPC is also not so concerned on the exchange rate going forward. Although the Rand had depreciated to the current levels of around R14.65/$ it is not much weaker than the R14.40/$ at the time of the previous meeting. 

The MPC also believes that overall risks to the inflation outlook are assed to be “balanced” and argue in the report that the Committee would: “like to see inflation expectations also anchored closer to the mid-point of the target range” 

This is exactly where the contradiction comes in. The QPM model forecast a rate of 4.2% for 2019 and much lower, so therefore it calls for a repo rate cut. 

Do they believe their own forecast?  

The downside risks that the MPC gave as the reasons why not to cut the repo rate is based on medium term expectations and not in the short run (2019). These risks factors are an escalation in global tensions and sustained higher oil prices (Although the Governor had mentioned in the press conference that the MPC is not concerned on the SAUDI oil facility attack as it is once off). 

The MPC argues that these risks could generate headwinds to growth. It does not give an indication how these risks will affect the QMP model so that upward pressure will increase on inflation expectations. 

These risks were prominent since the beginning of the year and yet the inflation rate came down to levels lower than 4.5% and the inflation expectations for the rest of the year are also lower. 

These are contradicting statements. 

The MPC also mentioning that public sector financing needs remain high and may exert pressure on the exchange rate and bond rates. Once again, these risks did not become worse since the previous meeting and even Moody’s had indicated that they may keep South Africa’s rating unchanged above junk. 

One must ask if the Bank’s OPM does not factor the above risks in? If so, it still shows a lower level of inflation expectations. For me it seems that the MPC is skeptical towards the results of their own model and wasted a great opportunity to boost confidence in the South African economy and to contribute towards economic growth.  

Chris Harmse is the Chief economist at Rebalance Fund Managers.