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Economists predict 25 basis point cut in interest rate despite VAT hike.
Economists predict 25 basis point cut in interest rate despite VAT hike.

Why analysts expect a rate cut in March


By Sunita Menon - Feb 27th 2018, 08:55

Economists are in agreement that an interest rate cut is almost a certainty, citing lower inflation, a stronger currency, and greater political certainty.

The consumer price index (CPI) put inflation at 4.4% in January 2018, its lowest level since 2015. CPI is one of the key measures the Reserve Bank’s monetary policy committee (MPC) uses to set the repo rate. The committee is scheduled to announce its next interest rate decision on March 28.

The election of Cyril Ramaphosa as both ANC and state president would help support the rand in the short term, said Nedbank economist Johannes Khosa.

If this was sustained and supported by further positive political developments, it could lead to an early interest rate cut of 25 basis points at the next meeting of the MPC, he said.

Finance Minister Malusi Gigaba’s announcement during the budget speech on Wednesday of the first value-added tax (VAT) hike in 25 years got mixed responses, with critics slating it as regressive and warning it would have dire financial consequences for the poor.

Old Mutual economist Johann Els said the hike would not have a huge impact on consumers as 40% of the CPI basket was exempt. Something that costs R100 will now go up to R100.88, he said.

The one percentage point increase could momentarily offset inflation, but this would be short-lived, said BNP Paribas economist Jeff Schultz.

"This will be a headache for inflation and the Reserve Bank but it ... will be short-lived. A VAT increase isn’t too dangerous economically and leaves room for the Bank to engage in further interest rate cuts," said Schultz.

According to Investec chief economist Annabel Bishop, however, the hike will increase the cost of living, with an estimated rise of at least 0.1% in CPI inflation over the first three quarters of the year. Inflation is expected to remain in the 3%-6% band in the medium term.

At the last MPC meeting in January, Reserve Bank governor Lesetja Kganyago flagged a possible Moody’s downgrade of SA’s sovereign credit rating.

Moody’s is the only one of three major ratings agencies that has SA’s foreign-currency and rand-denominated debt at investment grade.

However, the budget delivered on Wednesday was well received by the markets and is expected to have staved off another downgrade for now.

Momentum economist Sanisha Packirisamy said while the rand remains vulnerable, there is space for an interest rate cut of 25 basis points.

Read more about: sa economy | markets | inflation | cpi

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