South African Reserve Bank. Picture: MARTIN RHODES
South African Reserve Bank. Picture: MARTIN RHODES

Despite weak economic growth and low inflation in recent months, an interest rate cut this week is not likely — and neither is a downgrade from S&P Global Ratings.

The Reserve Bank’s monetary policy committee is expected to keep the repo rate unchanged on Thursday as globally monetary policy takes on a dovish tone, allowing for looser monetary conditions.

“The neutral tone in US monetary policy [is] indicative of stable US interest rates for the majority of this year and so likely for SA as well,” Investec chief economist Annabel Bishop said.

The combination of lower economic growth and inflation that is comfortably within the Bank’s 3%-6% target band will not be enough to spark an interest rate cut, given the Bank’s stated desire to see inflation expectations anchored closer to the 4.5% mid-point of the target band.

“Though the SA economy remains extremely weak, which argues for a possible interest rate cut, the current upward drift in SA inflation supports the view that the Reserve Bank can afford to leave interest rates unchanged during 2019,” said Stanlib chief economist Kevin Lings.

Much lower forecast

The Bank, which expects growth of 1.3% in 2019, is likely to revise its economic growth forecasts notably lower given the dismal economic performance in the first quarter. This came on the back of contractions in the mining, manufacturing and retail sectors.

On Wednesday, Statistics SA will release the consumer price index (CPI) for April. The annual change in CPI is the key measure used by the monetary policy committee to set interest rates.

Inflation rose to the mid-point of the target range in March, following hefty fuel-price increases. The April inflation print is expected to edge up in the wake of the steepest increase at the petrol pumps in four years and a hike in government levies, which took effect at the beginning of May.  

Despite this, inflation remains under control at both a headline and a core level, Lings said. Economists polled by Bloomberg expect the figure to rise moderately, to 4.6%.

Finally, after markets close on Friday, S&P is scheduled to publish its bi-annual review, in which it is expected to keep the country’s sovereign credit rating unchanged.

S&P lowered the country’s sovereign debt to below investment grade in 2017, in response to a surprise cabinet reshuffle by former president Jacob Zuma.

The ratings agency rates SA’s long-term foreign and local currency sovereign credit ratings at BB and BB+, below investment grade, while the outlook for both is stable.

In April, S&P associate director and primary credit analyst for SA Gardner Rusike said the biggest concern is economic growth and the impact it has on fiscal consolidation. SA has not seen growth of 2% in five years, as investment lagged.

Elize Kruger, of NKC African Economics, said: “S&P will likely take a conservative approach on SA ratings at this review, with no chance for a change in outlook to positive at this stage, providing President Ramaphosa with a window of opportunity to implement much-needed structural reform and to make progress on his stated plans to revive the economy post-election.”