The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

All the pieces of the puzzle have come together to build a case for the Reserve Bank to cut interest rates in July.

While the inflation rate quickened to 4.5% in May from April’s 4.4%, it has remained at the midpoint of the 3%-6% target range, which the Bank prefers,  for the past five months. Increasingly dovish sentiment from major central banks and a stronger rand have also given impetus to calls for an interest rate cut in July.

Growth figures released earlier in June showed the economy's performance was weaker than expected, so the Bank and the National Treasury will probably revise their forecasts down.

The Bank is under intense political scrutiny for its stance which is seen as too hawkish, with debate in the ANC and its alliance partners reignited over its mandate and the extent to which it takes economic growth and employment into account.

“Inflation is now well-anchored within the 3%-6% target range, and the economy is performing very poorly,” said Capital Economics economist John Ashbourne.

The monetary policy committee (MPC) next meets on July 16-18 to decide on policy. An interest-rate cut would provide some relief for consumers, still reeling from tax increases and higher fuel prices, and be a reversal of the controversial increase in November 2018.

The Bank's ability to keep inflation in check has meant that governor Lesetja Kganyago has come under further pressure to reduce interest rates, said PPS Investments portfolio manager Luigi Marinus.

“Following the recently reported disappointing GDP growth level and some questions around the mandate of the Bank, there may be an opportunity for the governor to act decisively at a time when South African consumers need it most,” Marinus said.


Kganyago said in a speech last week that current inflation and economic growth expectations suggest the central bank might have room to cut interest rates “over the next year or so”.

The rand held steady at a two-week high against the dollar on Wednesday, only some 7c weaker from the Reserve Bank’s last policy meeting on May 23. The rand has firmed 4.1% against the dollar since June 7, when it reached its 2019 low of R15.17/$. Markets have been steadily pricing in interest-rate cuts by the US Federal Reserve, which has also helped boost local bonds to their strongest level in more than a year.

At its last meeting, in May 2019, the MPC adopted a more dovish tone than in prior meetings in 2019 and narrowly decided to keep the repo rate unchanged at 6.75%, with two of the five members voting for a 25-basis-point cut.

In its May statement, the Bank said it expected headline inflation to average 4.5% in 2019, down from a previous forecast of 4.8%. However, it saw the average climbing to 5.1% in 2020, before dropping again to 4.6% for 2021.

Last week, the Bank signalled its willingness to drop interest rates, saying inflation outcomes over the past 10 months mean policy has not been as accommodative as it could have been.

A range of inflation dynamics, including food prices, weak demand in the economy and moderating wage growth had eased inflation, the Bank said.