The South African Reserve Bank’s Monetary Policy Committee (MPC) will meet next week, with economists and analysts expecting a 25 basis point cut to the prime lending rate.
The MPC last met at the end of May 2019, where it voted three to two to keep rates unchanged, following low consumer confidence in the country, coupled with international tensions driven by the US-China trade war.
Now, with South Africa’s inflation rate anchored well within the 3% to 6% range, economists believe the doves will win out and vote for a rate cut.
According to Intellidex analyst Peter Attard Montalto, while the group sees a stronger chance of a cut next week, the prospects are still very close to 50/50, and the case for a cut is being overplayed by the market.
Reasons for a cut now have been around since the last meeting, the analyst said, but there now exists some more ‘good’ reasons to implement it – such as a fall in global yields, Eskom’s tariff hikes, and lower oil and petrol prices.
The MPC will steer clear of making the cuts look like a political move – ie “to take pressure off consumers” – as this is not a ‘good’ reason to cut. The decision will be directed to ultimately be based in inflation targeting, the analyst said.
A Reuters poll of 24 economists in June also pointed to a wide expectation that a rate cut would be coming at the MPC’s next meeting.
Following a hold at the last meeting, Stats SA released GDP data for the first quarter of the year, showing a massive 3.2% contraction – far higher than expectations. Since the release of the GDP data, the Reserve Bank and government have been under pressure to reignite growth.
After the cut, the repo rate is expected to remain at 6.50% until the end of 2021 at least, the economists said, with inflation expected to average 4.5% in 2019 and 5.0% in 2020.