Lower-than-expected inflation might not be enough to persuade the Reserve Bank’s monetary policy committee to cut rates again in 2019.

Measured by the annual change in the consumer price index (CPI), inflation decelerated more than expected to 4% in July. The last time inflation was this low was in January.

This is below the midpoint of the Bank’s 3%-6% target band, which it prefers to anchor inflation at, and lower than the 4.3% expected by economists polled by Bloomberg. 

The major central banks have also adopted easier monetary policy stances, with the US Federal Reserve cutting its federal funds rate by 25 basis points (bps) in July.

“The big question now, however, is whether the Reserve Bank will ease further given forecasts that show inflation around or close to the Bank’s midpoint in the short to medium term. For now, a flat trajectory is expected given uncertainties around the trajectory of the rand,” Nedbank economist Busisiwe Radebe said.

While the moderate inflation outlook and weak economic growth prospects could justify further monetary policy loosening, there is a risk presented by the recent depreciation in the rand and fears that SA could see a negative credit rating action from Moody’s Investors Service in November.

“This will likely stem the Bank to conservatism,” NKC economist Elize Kruger said.

The local currency has lost almost 10% since the last monetary policy committee meeting in July. This week, the rand hit fresh 2019 lows as fears of a slowdown in global economic activity weighed on sentiment. On Wednesday afternoon, the rand had strengthened 1.14% to R15.1909/$, leading emerging market currencies. Its one-week implied volatility was the highest among major currencies at 15.75%.

Lowering interest rates could leave the rand more exposed to the “negative external backdrop” and the Bank should wait for the some direction in US monetary policy before considering a rate cut, Rabobank emerging markets analyst Piotr Matys said. 

“The Bank should wait for the Fed to cut rates further, see how the markets respond to that and if the response is positive and the rand benefits from a potential improvement in market sentiment, then it may consider a rate cut,” he said.

The change in CPI is the key measure used by the monetary policy committee to set interest rates. The committee next meets to decide on policy on September 17-19. Another interest rate cut will provide further relief for consumers who are still reeling from tax increases and higher fuel prices.

At its last meeting, in July 2019, the committee cut interest rates by 25bps, effectively reversing a controversial interest rate hike in November 2018. The Bank cited lower growth and lower inflation expectations for the cut. While some analysts called for a cut of 50bps, the committee said it did not consider it.

“With inflation now near the bottom of the target range, we think that there is a brief window for another rate cut. The arguments that justified a rate cut in July are even stronger now; inflation is below the target midpoint and the economy remains very weak,” Capital Economics economist John Ashbourne said.

However, given the Bank’s view on the limited value of reducing interest rates as a tool to stimulate the economy, there is also no real possibility of seeing any interest rate changes, PwC economist Christie Viljoen said. /With Odwa Mjo