ECONOMIC WEEK AHEAD: Repo rate cut expected

The consensus forecast is that the SA Reserve Bank’s monetary policy committee (MPC) will cut the repo rate by 25 basis points (bps) to 7.75% on Thursday.

At the last MPC meeting in September, the members had considered no change, a 25 bps cut or a 50 bps drop before reaching a consensus of a 25 bps reduction.

Independent economist Elize Kruger at Carpe Diem said with headline consumer inflation moderating notably, the real repo rate, which is nominal minus inflation, is exceptionally restrictive for an economy muddling along at/below 1% real growth.

With gradual 25 bps cuts every second month, the real repo rate will remain fairly restrictive for some time and as such the Bank has ample justification to cut even by 50 bps at the upcoming MPC meeting. However, given recent Bank rhetoric, the recent rand depreciation and a conservative committee, a 25 bps cut remains the base case forecast.

The MPC will have the benefit of the October consumer inflation report, which is due to be released on Wednesday. Kruger expects the inflation rate to moderate to 3.0% year on year from 3.8% year on year in September. This is because October is traditionally a low survey month, thus developments in fuel and food prices typically play a heavier role so lower fuel prices will be the main driver of the October print.

The Bureau for Economic Research (BER) at Stellenbosch University has a similar expectation as it forecast a move close to 3%. Even for November, when there was an increase in the fuel price at the start of the month, petrol is expected to be a drag as prices were much higher this time last year. This is why the BER forecast a sub 4% inflation rate for the remainder of the year.

The Nedbank Group economic unit is slightly less optimistic and only expects consumer inflation to have moderated to 3.3% year on year. Nedbank expects fuel price deflation to exert further downward pressure on headline inflation in the final months of this year, with lower global oil prices offsetting the impact of the expected weakening of the rand. However, the downside in inflation will partly be contained by food inflation, which has started drifting higher off a low base.

In addition to the consumer inflation, Stats SA will release a range of September internal trade data as well as September building plan figures, while the RMB/BER business confidence index, out on Wednesday, will be closely watched. It will provide an essential update on how sentiment developed through the fourth quarter, with no load-shedding and local political stability likely to be positive.

The electricity data showed that electricity consumption grew 6.1% year on year in September after a 4.2% year-on-year gain in August and a 6.9% year on year jump in July. This may have fed through into the September internal trade, while retail trade sales could have received a boost from the introduction of the “two-pot” retirement scheme in September. The SA Revenue Service, at the medium-term budget policy statement, said revenue collection from the “two-pot” retirement scheme was R7.2bn so far, above the R5bn it had expected.

Internationally the focus will be on the Group of Twenty (G20) heads of state summit in Rio de Janeiro, Brazil, on Monday and Tuesday. SA will be the chair of the G20 from December 1.

The usual batch of preliminary purchasing managers’ index (PMI) data for Japan, India, the eurozone, UK and US will follow on Friday with Trading Economics in most cases expecting an improvement in November compared with October.