South Africa could see 2 more rate cuts before the end of the year

A Reuters poll of 26 economists shows that the majority believe South Africa will get a rate cut of 25 basis points in the coming weeks.

A cut would bring the repo rate down to 6.50%, with many expecting an additional rate cut before the end of the year.

Of the 26 economists polled, 17 said there would be a cut of 25 basis points, one said there would be a cut of 50 basis points, and eight said there would be no change.

In July, the Reserve Bank announced a surprise rate cut on the back of an improved inflation outlook and a strengthening economy. GDP data for the second quarter of 2017 has since shown 2.5% quarter on quarter growth, pulling the economy out of a recession.

Economists said that there still remains a good chance of a second cut in September, and room for a third cut in November.

The Reserve Bank warned, however, that should South Africa’s economic situation change, it would not hesitate to reverse the cuts as necessary.

Fund manager at Ashburton Investments, Wayne McCurrie on Tuesday said that any rate cuts seen in 2017 and 2018 would likely be undermined by tax hikes, as South Africa’s National Treasury tries to plug a R50 billion tax hole.

McCurrie said that the Reserve Bank will likely cut rates by 25 basis points twice more, but has a window until around mid-2018 to cut further – so we may get another 25bp cut.

But with tax compliance slipping, Treasury is running into a funding problem. As such, finance minister Malusi Gigaba will likely have to look to tax hikes to fill a R50 billion tax hole over and above the R30 billion gap seen in the February 2017 budget speech.

“Taxation increases are on their way. This will negate any relief from lower interest rates, unfortunately,” McCurrie said. “South Africa’s fiscal position is really poor. Our estimates are a deficit of  plus/minus 3.5% for 2017 and 2018 versus Treasury’s position of 3.1% for 2017 and below 3% for 2018.”

Read: More tax increases are on the way: economist

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