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Interest rate cut may be on the cards.
Interest rate cut may be on the cards.

Interest rate cut may be on the cards


By Hilary Joffe - Sep 21st 2017, 10:36

With inflation heading down towards the mid-point of the target range, most economists expect another 25 basis point cut in interest rates when the Reserve Bank’s monetary policy committee concludes its three-day meeting on Thursday. 

Statistics SA on Wednesday reported better-than-expected consumer price inflation figures for August, with the inflation rate rising to 4.8% — worse than June’s 4.6% but better than the consensus forecast of 4.9%.

The Bank cut rates for the first time in five years at its last meeting in July, in response to a better inflation outlook and weak economic growth.

Though the committee makes its rate decisions based on the expected future of inflation rather than on the past, lower-than-expected inflation rates in recent months have provided a lower base for the Bank’s inflation forecast and indicate that underlying inflation pressures are moderating.

That was expected to create space for the Bank to "remain in a mild interest rate cutting cycle", said Old Mutual Investment Group senior economist Johann Els, even though the Bank would be cautious in an environment of political uncertainty and potential fiscal fallout.

Els said the economy was in a slow growth trap and the Bank was likely to "look through" the second quarter economic growth rebound. Another interest rate cut could help to lift confidence slightly, he said.

Stanlib economist Kevin Lings said SA remained vulnerable to changes in global investor sentiment so while the Bank was expected to cut rates further in 2017, the extent would be relatively modest.

"Ultimately the Bank has to balance the current lower growth/inflation data against the risks associated with SA’s increased vulnerability to changes in foreign capital flows," he said.

The main contributor to August’s higher inflation rate was transport inflation, which increased to 3.9% in August from 1% in July because of petrol and diesel price hikes.

The fuel price component, which makes up almost 15% of the inflation basket, is expected to continue to exert upward pressure in September.

But slowing food price inflation has helped to offset the impact of the fuel factor.

Investec economist Kamilla Kaplan said consumer inflation would remain well within target, falling to 4.3% by year-end and averaging 5.2% for 2017.

Nedbank’s economists said the key risk to inflation was the rand, which was likely to be volatile. "If there are no currency shocks in December, our forecast is for possible further rate easing in early 2018."

The Bank is due to announce the interest rate decision at 3pm on Thursday.

© BusinessLIVE MMXVII 

Read more about: sa economy | interest rates | inflation

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