How narrowing of deficit may open way to rate cuts
Coupled with the narrowing of the deficit is the easing of inflation in recent months
The narrowing of the current account deficit opened room for more interest rate cuts in 2018, despite the Reserve Bank’s hawkish stance, economists speculated on Thursday following the release of the Bank’s quarterly bulletin.
The current account has stabilised, recording a narrower deficit than in previous years. The current account is indicative of trade with the rest of the world. Between 2012 and 2015, the current account deficit averaged more than 5% of GDP.
In the third quarter of 2017, the current account narrowed to 2.3% of GDP, from 2.4% the previous quarter. Compared with the same period in 2016, the deficit narrowed significantly from 3.8% of GDP.
"Expectations of tighter monetary policy are misplaced," said Capital Economics economist John Ashbourne.
While hawkish language from policy makers has heightened the expectations of interest rate hikes in the coming quarters, he said there was a need for tight policy in order to support the deficit, which was pronounced in 2013 and 2014 but is now fading.
"In fact, the argument for hiking rates has weakened in recent weeks," he said.
Coupled with the narrowing of the deficit is the easing of inflation in recent months. Inflation has remained within the target band of 3%-6%.
The annual consumer price index saw a marginal 0.2 percentage point decrease to 4.6% year on year in November, compared with 4.8% year on year in October. The producer price index was steady at 5.1% year on year in November compared with 5% in October.
The biggest risk to the producer inflation outlook is rand volatility, said Nedbank economist Busisiwe Radebe.
Despite the risks, consumer and producer inflation are expected to remain below the Bank’s 6% upper target range over the next few months.
However, weak economic activity and low confidence left room for the Bank to cut rates if there is a rebound in the rand, said Radebe.
Domestic political risks, alongside the risk of further credit rating downgrades, as well as changes in global risk appetite, are expected to keep the rand volatile over the short to medium term, said Stanlib chief economist Kevin Lings.
In November, the Bank warned at the monetary policy committee meetings that, according to its quarterly projection model, there may be three rate increases of 25 basis points each by the end of 2019, compared with one increase previously.