Falling inflation boosts interest rate cut chances
By Sunita Menon - Aug 25th 2017, 10:54
Inflation has dipped below the 5% mark for the first time since November 2015, supporting the case for another interest rate cut at the Reserve Bank’s next monetary policy committee meeting, economists say.
Headline inflation eased to 4.6% year on year in July, from 5.1% in June, Statistics SA’s consumer price inflation (CPI) data showed on Wednesday.
Economists said this boosted their estimations that the Reserve Bank might pencil in another 25 basis point interest rate cut when its monetary policy committee meets again in September.
Should this be the case, it would add to the Bank’s surprise 25 basis point interest rate cut at its July committee meeting, which brought the repo rate down to 6.75%.
At the time, Bank governor Lesetja Kganyago said: "In this highly uncertain environment, future policy decisions will be dependent on data outcomes and our assessment of ... risks."
While risks to the inflation outlook stemming mostly from the volatile exchange rate remained, headline inflation was expected to remain anchored around the midpoint of the inflation target band for some time, said First National Bank economist Mamello Matikinca.
The rand was little changed against the dollar on Wednesday following the release of CPI numbers. The rand has been relatively stable since July.
Matikinca warned, however, that the interest rate-cutting cycle was expected to remain shallow and brief.
The latest inflation figures, as well as the outlook for inflation for the remainder of the year, not only affirmed the Reserve Bank’s decision to cut rates in July but also supported the view that it would probably cut rates once more in 2017 in September, said Nedbank economist Busisiwe Radebe.
The Bank would be likely to leave rates on hold at its last meeting of 2017 in November, Radebe said, "as the key risk to the inflation outlook remains the rand and this is likely to be volatile ahead of ratings agency updates and the ANC’s elective conference in December".
NKC economist Elize Kruger said: "These favourable inflation trends, in combination with the resilience of the rand exchange rate and the dismal state of the economy, have already triggered a 25 basis point cut".
Momentum economist Sanisha Packirisamy said the current interest rate-cutting cycle was comparatively shallow relative to previous cycles, given the possibility of further credit rating downgrades, political uncertainty, potential negative swings in emerging market sentiment and high domestic inflation expectations. © BusinessLIVE MMXVII
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