Politics weighs as Reserve Bank mulls rate cut
The weak economy requires an interest rate cut, but the Reserve Bank's monetary policy committee may be reluctant to announce one when it meets this week.
Economists said the bank might not want to be seen to be bowing to political pressure to boost economic growth through lower interest rates.
There would be no repeat this year of last year's significant drought-driven increase in food prices, while the stronger rand and the recent drop in fuel prices also helped to ease inflation back into the Reserve Bank's 3%-6% target band, they said.
Interest rates were last cut in July 2012. Consumers and investors will know on Thursday whether a new easing cycle has begun. "We have a very weak economy that warrants rate cuts," said Nazmeera Moola, economist at Investec.
Economic growth contracted 0.7% in the first quarter of the year, plunging South Africa into a technical recession. Growth is projected to be less than 1% for the year.
But global and local political uncertainty, coupled with the chance that interest rates globally are set to increase and attract portfolio flows out of emerging markets, may also contribute to a reluctance to cut rates, Moola said.
She said threats to the Reserve Bank's mandate and political pressure were not "big enough to drive the decision all by itself, but in a situation where the economics provide the backdrop, this is yet another factor".
This week, in court papers filed in the Pretoria High Court, Reserve Bank governor Lesetja Kganyago said public protector Busisiwe Mkhwebane's proposed remedial action to change the bank's mandate to include the socioeconomic wellbeing of all citizens, exposed her "lack of competency" and fundamental "understanding of the monetary system and the role of central banks".
The bank seeks an order to have Mkhwebane's Bankorp report - which focused on its bailout of Bankorp under the apartheid government - reviewed and set aside.
But even if interest rates were cut, further action would be needed to ease the problems South Africa faces.
Moola said interest rate cuts were not going to solve "the ultimate problem because that is about the structural dynamics and that is about the rest of the government providing policy certainty".
Weak economic growth was reflected in a drop in the consumer confidence index during the second quarter of this year after a slight improvement in the previous quarter.
The "economic outlook" subindex of the FNB/BER consumer confidence index dropped to -22 in the second quarter from -1 in the first quarter following President Jacob Zuma's cabinet reshuffle and the credit rating downgrades.
Private sector investment was also depressed, StatsSA reported last month.
"Cutting interest rates is not going to dramatically shift either of those things," Moola said.
Tinyiko Ngwenya, economist at Old Mutual Investment Group, said the strong rand, weak growth and lower inflation all pointed to two 25-basis-point interest rate cuts being back on the cards before year end.
"We expect consumer inflation of 5% in June and 4.9% in July, with our 2017 average inflation forecast now at 5.6%."
Goolam Ballim, chief economist at Standard Bank, said the sharp fall in the rand after June 27 underscored the vulnerability of the currency to perceptions of South Africa's "political fluidity and especially the risk of further institutional erosion".
He said that under these circumstances the Reserve Bank would be reluctant to trim rates, to avoid undermining the rand's fundamentals.
"In other words, the Reserve Bank's reaction function - in addition to incorporating the forecast path of inflation, which is fairly benign, and notably weak output growth, which suggests idle industrial capacity - has to acknowledge the risk of pronounced rand deprecation and, in turn, an inflation outcome above what is presently projected."
Economists expect inflation to remain within the target range for the rest of the year if the rand remains stable.
"A rate cut in September is probable, although this will largely hinge on the rand's price," Ballim said. But he said: "In the event the Reserve Bank imminently engages a rate-cutting cycle, it may be scoring an own goal, forcing them to subsequently resume a tightening cycle. The Reserve Bank would be judged to have acted prematurely."
Jeffrey Schultz, economist at BNP Paribas South Africa, said the inflation outlook mattered in terms of comparing South Africa's real interest yields with those of its peers such as Brazil, Turkey, Russia, Colombia and Mexico.
"How South Africa's real yields compare with many of its peers is one of the determinants of how aggressive foreign participation in our bond market will be."
Schultz said that in the event of a modest cutting cycle from the third quarter of this year, South Africa's real rates would still look more compelling than those of its emerging market peers.