In July the South African Reserve Bank (SARB) opted to reduce the Repo rate from 7% to 6.75%. This cut in the rate was the first in 5 years and surprised many (including me!). Now the consensus seems to be that the SARB is at the start of a rate cutting cycle and that there is a very good chance we will see another cut later this afternoon.
My prediction: 0.25 reduction (the interest rate at 6.5%).
How did we go from a surprise cut two months ago to economists being confident that we’ll see a cut in September AND in November?
The SARB manipulates the Repo rate with the stated aim of keeping inflation within a target band of 3% to 6%. Figures released on Wednesday show consumer inflation rising to 4.8% year-on-year in August from 4.6% in July which is just below the forecast of 4.9% and well within in the SARB’s comfort zone.
August’s lower than expected inflation occurred in spite of large fuel price increases, a strong US Dollar, continued drought and the July rate cut which suggests that inflationary pressure from these external forces is being cushioned. Most likely by a lack of spending by both consumers and business whose confidence levels have dipped to record lows.
The current, relatively low inflation environment gives the SARB the space it needs to consider how it can facilitate growth in an economy that has only very recently and barely dragged itself out of recession.
Political concerns like the ANC leadership race will continue to weigh heavily on economic development: uncertainty does not attract investment or instill confidence. Yet the SARB can assist by reducing the cost of lending which will give both consumers and business some time to catch their breath just before the Christmas holiday splurge and to encourage spending into the new year.
Hopefully business will use any predicted interest rate reductions to expand operations and employ more people and consumers will use the extra cash in their pockets to reduce the debts they have already accrued.
What’s more likely is that businesses that can, will wait for further reductions while reducing their debt burden and consumers will continue the modern South African tradition of over indebtedness well beyond 2018. All resulting in no significant positive change to GDP growth despite the best efforts of the Governor and the MPC.