Why economists expect a steady repo rate for 2018
‘The Bank will play it on the safe side given the risks’
Never mind Thursday’s interest-rates decision, economists say the South African Reserve Bank will not be cutting the repo rate again in 2018.
That is because the inflation rate is edging up after surprising on the downside in recent months.
In the first set of data that reflected the value-added tax (VAT) increase announced earlier in 2018, Statistics SA said on Wednesday the annual headline inflation rate had increased to 4.5% in April, up from a seven-year low of 3.8% in March.
Since the last monetary policy committee (MPC) meeting — when the Bank cut the main rate by 25 basis points and governor Lesetja Kganyago said the rand was overvalued — the currency has slid about 5% against the dollar.
Oil prices have also jumped, putting upward pressure on prices of imported goods.
"The Reserve Bank will flag heightened near-term pressure that didn’t exist at the last MPC," said economist Thabi Leoka. "It makes sense to pause," she said.
The rand lost further ground against the dollar on Wednesday, erasing gains from earlier in the week. In late trade it was at R12.6418/$ from R12.5703.
"The Bank takes a longer-term view and will especially be on the lookout for any second-round inflationary pressures that could be building up," said Sasfin Wealth analyst Alvin Chawasema.
Kganyago said at the last MPC meeting that the VAT increase in April — the first in a quarter of a century — would push the inflation rate up by about 0.6 percentage points in coming months.
While SA had a reprieve from ratings agency Moody’s in March and is expected to escape unscathed after S&P Global Ratings announces its latest review of the country on Friday, threats of downgrades had not completely disappeared, said Momentum economist Sanisha Packirisamy.
That is because the country’s efforts to restore the financial health of state-owned companies are still at an early stage.
"The Bank will play it on the safe side given the risks," she said.
Economists also pointed to an improving economy as another reason for the Bank to refrain from easing policy, with Nedbank saying that the MPC would probably start tightening it in 2019.
The 2018 domestic growth outlook is more favourable, although it remains challenging, with the bank expecting growth of 1.7% in 2018, 1.5% in 2019 and 2% in 2020.
That is still below the 3% growth rate that President Cyril Ramaphosa is seeking to achieve as the country battles an unemployment rate close to 27%.
"The MPC will probably leave policy rates unchanged for the rest of the year before embarking on a mild tightening cycle from around September 2019," said Nedbank economist Johannes Khosa.