SARB stays interest rates at 7 %

Consumers can rest easy for now as the South African Reserve Bank (SARB) decided to stay interest rates at 7% yesterday.

“Headline inflation has now returned to within the target range as expected, with outcomes in March and April surprisingly on the downside. While the inflation outlook has improved over the near term, the longer-term forecast trajectory is unchanged and uncomfortably close to the upper end of the target range,” stated SARB governor, Lesetja Kganyago.

In line with the previous MPC forecast, headline consumer price inflation is expected to remain within the range for the rest of the forecast period. “Inflation is expected to average 5.7% this year compared with 5.9% previously, while the forecast for 2018 has moderated by 0.1 percentage point to 5.3%. The forecast average for 2019 is unchanged at 5.5%,” added Kganyago.

Responses to the announcement

“The SARB once again erred on the side of caution as the balance of risks to the inflation outlook remains tilted to the upside. While the notable deceleration in headline inflation and the moderation in core inflation suggest that inflation is becoming less of a concern, renewed exchange rate weakness and elevated inflation expectations threaten this outlook. We continue to believe that the bank has reached the peak of the hiking cycle, and will wait for risks to lean more towards the downside before reducing the policy rate, said Sizwe Nxedlana, chief economist at First National Bank (FNB).

While Kganyago remained fairly vague as to whether or not we could see a rate cut later in the year, there was interesting in the statement at the end. He noted: “A reduction in rates would be possible should inflation continue to surprise on the downside and the forecast over the policy horizon be sustainably within the target range. However, in the current environment of high levels of uncertainty, the risks to the outlook could easily deteriorate, and derail the current favourable assessment.”

Nomura analyst Peter Montalto reacted: “To us this basically says – yes cuts are possible within the framework, here is how they can happen (lower long-run inflation projections), but equally easy are factors to prevent that.”

“This is an interesting masterstroke of communications. It is there to convince the markets that there is a framework and that the cuts would happen within the same framework without a need for the MPC to shift its mind-set into a new place – and yet cuts are not ‘obvious’ or easy in any sense with the risk outlook. It makes the conditions for cuts much more transparent – both for and against them happening,” added Montalto.

That being said a possible reduction could be granted inflation continues to drop and forecast over the policy horizon remain within the 3-6% target range. “However, in the current environment of high levels of uncertainty, the risks to the outlook could easily deteriorate, and derail the current favourable assessment. Kganyago then further singled out the rand volatility and electricity prices among factors that posed significant risks to the inflation outlook,” added Montalto.

Other factors stressing the current economic situation is the looming Moody’s ratings review decision and the ongoing political instability.

“By the time the MPC meets again at the end of July there should be more clarity about Moody's anticipated decision on SA's domestic currency downgrade, the ANC policy conference will have taken place, and there may be a less volatile element in global sentiment about emerging markets. The MPC will then be in a better position to make a judgement call on future interest rates and confirm that SA is indeed at the end of the interest rate tightening cycle,” stated The North West School of Business and Governance economist Professor Raymond Parsons.

“The fact that the MPC has now reduced its growth forecast for 2017, having inexplicably and in retrospect unwisely raised it at its previous meeting, merely confirms the view of many economists that recent political developments have increased the downside risks to economic growth. The MPC reference to the continued weakness in private fixed capital investment again emphasises why strengthening investor confidence remains essential to SA's future economic performance,” concluded Parsons.