Reserve Bank treads carefully as risks to inflation outlook threaten
The Reserve Bank disappointed the markets on Thursday by failing to cut the repo rate, noting that a number of risks to the inflation outlook had increased amid heightened uncertainty.
Three members of the monetary policy committee voted to cut rates, while three opted to stay put. Governor Lesetja Kganyago is assumed to have had the deciding vote.
At the last monetary policy committee meeting in July, the Bank cut the repo rate by 25 basis points to 6.75%, sparking hope that this was the start of a rate-cutting cycle.
However, Kganyago was emphatic during the news conference on Thursday that the Bank had never said SA was in a cutting cycle; rather, it had emphasised that future decisions would be data dependent.
While inflation is still expected to remain within the 3%-6% target range until the end of 2019, and the Bank’s inflation forecast remains largely unchanged, some inflation risks have become more pronounced. The committee’s statement identifies several of these risks, of which the rand remains the key one.
The committee’s concern is that should inflation and/or growth move higher than expected in Europe and the US, it could speed up monetary tightening, which could have a negative effect on capital flows into SA, hurting the rand.
The rand could also be hit should SA suffer any further ratings downgrades, something that remains a risk, given the country’s "increased fiscal challenges and political uncertainty", the committee noted.
A further upside risk relates to the possibility that Eskom could be awarded a larger electricity tariff increase in
July 2018 than the 8% the Bank has assumed.
Eskom is asking for a 20% tariff increase. If awarded, it could raise the Bank’s headline inflation forecast by between 0.2 and 0.3 percentage points, Kganyago warned.
"Today’s meeting was a reminder that the Bank is a conservative and slow-moving institution," said Capital Economics’s John Ashbourne.
However, he believed that the Bank has just taken a brief pause and will cut again by 25 basis points in November on weaker inflation and growth.
Investec economist Kamilla Kaplan was not so sure, noting that the rand could be in for a bumpy ride over the next few months.
The medium-term budget statement is scheduled for October, rating agency reviews in November and the ANC elective conference in December.
This could make it more, not less, challenging for the Bank to ease rates at the November meeting, she said.