Hilary Joffe Columnist
Reserve Bank governor Lesetja Kganyago. Picture: FREDDY MAVUNDA
Reserve Bank governor Lesetja Kganyago. Picture: FREDDY MAVUNDA

The Reserve Bank cut interest rates for the second time in five years, saying the inflation outlook and inflation expectations had improved, and the risks had subsided, especially after Moody’s Investors Service affirmed SA’s investment-grade rating on Friday.

But the decision was a close call, with three of the seven monetary policy committee members favouring no cut, and economists expect this could be the last of the cuts.

“That’s it, everyone,” said Standard Chartered economist Razia Khan, who predicts there could even be a rate hike by the end of 2018, if the economic growth rate recovers quickly.

NKC economists Elize Kruger and Gerrit van Rooyen said a window of opportunity had presented itself with the potential negative effect of a Moody’s downgrade having disappeared, inflation at a three-year low and real interest rates at a seven-year high, but they forecast no further cuts, with interest rates set to remain at the current level for a prolonged period.

Bank governor Lesetja Kganyago said that four members of the committee had favoured the 25-basis-point cut, which had been decided on after a “very heated debate”, with the others preferring to hold rates, and no discussion of a 50-basis-point cut.

The committee is now back at full strength with seven members, including new adviser to the governors Fundi Tshazibana, a former Treasury deputy director-general, whose most recent post was at the IMF in Washington.

Kganyago said value-added tax (VAT) and the exchange rate had “pulled in opposite directions”. The stronger rand was expected to offset the upward pressure the April 1 hike in the VAT rate would place on inflation over the coming year.

Kganyago said Moody’s affirmation of SA’s sovereign rating and the change in outlook from negative to stable had contri-buted to recent rand resilience.

However, the Bank’s models now estimated the rand was “somewhat overvalued”.

Kganyago said the Bank did not expect further sustained appreciation in the local currency and a key risk to the rand was the possibility of tighter-than-expected US monetary policy.

He also again flagged the level of inflation expectations as a concern, even though the latest Bureau for Economic Research survey shows expectations came down to multiyear lows in the first quarter, with five-year expectations declining to 5.3%.

“While these developments are welcome, the MPC [monetary policy committee] would prefer to see inflation expectations anchored closer to the midpoint of the target band,” Kganyago said.

The rand initially weakened to R11.77 to the dollar during the governor’s statement, but picked up to R11.74, ending Tuesday at R11.67. The Bank now expects the economy to grow 1.7% in 2018, up from its previous forecast of 1.4%, but has revised 2019’s forecast down, from 1.5% to 1.4%, rising to 2% in 2020. Although the committee described the growth outlook as “more positive but still challenging”, Kganyago said the risks to the growth forecast were on the upside.

He said the low point of the inflation cycle was probably reached in the first quarter of 2018, at a forecast average of 4.1%, and headline inflation for 2018 was expected to average 4.9% — unchanged since the committee’s last meeting in January — while the forecast for 2019 was revised down from 5.4% to 5.2%.

The Bank factored higher fuel prices into its forecast, including a hike of about 60c-per-litre in April. However, Energy Minister Jeff Radebe on Wednesday announced a petrol price hike of between 69c and 72c a litre for Gauteng, to take effect on April 4, which includes the increases in fuel and Road Accident Fund levies announced in the February budget, as well as diesel and petrol transport cost increases approved by the National Energy Regulator.

“The prices of crude oil and refined petroleum products increased during the period under review. This led to higher basic fuel prices on all the petroleum products.

“The main contributing factors were the tightening of stock levels in the USA and the uncertainty over the future of Iranian supply due to fears that the US might reimpose sanctions on Iran.

“Furthermore, the Saudi Arabian Energy Minister, Khalid al-Falih, said [on March 22] that Opec [Organisation of the Petroleum Exporting Countries] members will need to continue co-ordinating with Russia and other non-Opec oil-producing countries on supply curbs in 2019,” Radebe said.