By Tammy Foyn And Karl Gernetzky
The Reserve Bank delivered on South Africans’ hope for a cut in interest rates on Wednesday‚ announcing a reduction of 25 basis points in the repo rate to 6.5%.
The rate cut offers some relief to consumers‚ who will have to contend with an increase in the VAT rate to 15% from 14% on April 1 and an expected petrol price increase of about 63c a litre‚ including the fuel levy and Road Accident Fund increases announced in the budget in February.
The cut was neither a surprise nor a foregone conclusion‚ with Investec’s Annabel Bishop putting the odds at 50-50‚ and saying the market was pricing in a 40% chance of the cut.
Economic growth that came in better than expected in the fourth quarter‚ and Moody’s decision to leave SA’s credit rating one notch above junk and improve its outlook to stable‚ were among the factors in favour of a cut.
“The domestic growth outlook is more positive but still challenging‚” Reserve Bank governor Lesetja Kganyago said on Wednesday. “Growth in the fourth quarter surprised significantly to the upside‚ and there are signs of increased business confidence.”
The Bank’s monetary policy committee last cut rates at its July 2017 meeting‚ which was the first cut in five years and took the repo rate to 6.75%.
That cut came as a surprise‚ and led to hope that it marked the start of an easing cycle‚ but an expected cut in September did not materialise.
Wednesday’s cut is not generally seen as a sign of further cuts to come.
The Bank’s three-day meeting was held from Monday to Wednesday this time‚ instead of the usual Tuesday to Thursday‚ due to the Easter holiday weekend.
First National Bank chief economist Mamello Matikinca said before the meeting that any cut was unlikely to be a unanimous decision‚ as data in the latest Quarterly Bulletin raised concern about a potential wage price spiral that would concern the policy hawks on the monetary policy committee (MPC).
Another concern is the effect of the April 1 VAT increase on inflation. Kganyago referred to this on Wednesday‚ saying: “While the increase in the value-added tax (VAT) rate to 15% places temporary upside pressure on inflation‚ this is mitigated by the stronger exchange rate‚ which has contributed to the changing inflation risk profile.”
Inflation as measured by the consumer price index (CPI) has been comfortably within the Bank’s 3%-6% target band for the better part of a year‚ and slowed more than expected in February — coming in at 4%‚ from 4.4% in January and against forecasts for 4.2%.
“The rand has reacted positively to domestic political developments in the past months and was given further support following the recent sovereign credit rating announcement‚” Kganyago said.
Further support from the rand came from dollar weakness‚ he said.
The Bank’s latest forecast is for inflation to average 4.9% in 2018 — unchanged from the January forecast; 5.2% in 2019 — from 5.4% forecast in January); and 5.1% in 2020.
“The MPC would like to see the inflation expectations anchored closer to the midpoint of the target band‚” Kganyago said.
The growth outlook for 2018 has also improved‚ with a forecast of 1.7% — from 1.4% forecast in January. But the 2019 forecast dips to 1.5%‚ from 1.6% forecast in January; and growth of 2% is expected in 2020.
Growth for 2017 came in at 1.3%‚ beating the 1% forecast by Treasury and the 0.9% that the Reserve Bank forecast in January.
Slow growth‚ and a lack of policies to improve it‚ were among the concerns of rating agencies that downgraded SA to junk last year.
The reprieve granted by Moody’s on Friday‚ however‚ was followed by a reality check from S&P Global this week‚ which said SA was still growing too slowly to be lifted out of junk status.
Kganyago warned there were difficulties presented by international developments‚ including a looming trade war and global monetary policy tightening.
- BusinessLIVE
Interest rate cuts to soften VAT blow
The Reserve Bank delivered on South Africans’ hope for a cut in interest rates on Wednesday‚ announcing a reduction of 25 basis points in the repo rate to 6.5%.
The rate cut offers some relief to consumers‚ who will have to contend with an increase in the VAT rate to 15% from 14% on April 1 and an expected petrol price increase of about 63c a litre‚ including the fuel levy and Road Accident Fund increases announced in the budget in February.
The cut was neither a surprise nor a foregone conclusion‚ with Investec’s Annabel Bishop putting the odds at 50-50‚ and saying the market was pricing in a 40% chance of the cut.
Economic growth that came in better than expected in the fourth quarter‚ and Moody’s decision to leave SA’s credit rating one notch above junk and improve its outlook to stable‚ were among the factors in favour of a cut.
“The domestic growth outlook is more positive but still challenging‚” Reserve Bank governor Lesetja Kganyago said on Wednesday. “Growth in the fourth quarter surprised significantly to the upside‚ and there are signs of increased business confidence.”
The Bank’s monetary policy committee last cut rates at its July 2017 meeting‚ which was the first cut in five years and took the repo rate to 6.75%.
That cut came as a surprise‚ and led to hope that it marked the start of an easing cycle‚ but an expected cut in September did not materialise.
Wednesday’s cut is not generally seen as a sign of further cuts to come.
The Bank’s three-day meeting was held from Monday to Wednesday this time‚ instead of the usual Tuesday to Thursday‚ due to the Easter holiday weekend.
First National Bank chief economist Mamello Matikinca said before the meeting that any cut was unlikely to be a unanimous decision‚ as data in the latest Quarterly Bulletin raised concern about a potential wage price spiral that would concern the policy hawks on the monetary policy committee (MPC).
Another concern is the effect of the April 1 VAT increase on inflation. Kganyago referred to this on Wednesday‚ saying: “While the increase in the value-added tax (VAT) rate to 15% places temporary upside pressure on inflation‚ this is mitigated by the stronger exchange rate‚ which has contributed to the changing inflation risk profile.”
Inflation as measured by the consumer price index (CPI) has been comfortably within the Bank’s 3%-6% target band for the better part of a year‚ and slowed more than expected in February — coming in at 4%‚ from 4.4% in January and against forecasts for 4.2%.
“The rand has reacted positively to domestic political developments in the past months and was given further support following the recent sovereign credit rating announcement‚” Kganyago said.
Further support from the rand came from dollar weakness‚ he said.
The Bank’s latest forecast is for inflation to average 4.9% in 2018 — unchanged from the January forecast; 5.2% in 2019 — from 5.4% forecast in January); and 5.1% in 2020.
“The MPC would like to see the inflation expectations anchored closer to the midpoint of the target band‚” Kganyago said.
The growth outlook for 2018 has also improved‚ with a forecast of 1.7% — from 1.4% forecast in January. But the 2019 forecast dips to 1.5%‚ from 1.6% forecast in January; and growth of 2% is expected in 2020.
Growth for 2017 came in at 1.3%‚ beating the 1% forecast by Treasury and the 0.9% that the Reserve Bank forecast in January.
Slow growth‚ and a lack of policies to improve it‚ were among the concerns of rating agencies that downgraded SA to junk last year.
The reprieve granted by Moody’s on Friday‚ however‚ was followed by a reality check from S&P Global this week‚ which said SA was still growing too slowly to be lifted out of junk status.
Kganyago warned there were difficulties presented by international developments‚ including a looming trade war and global monetary policy tightening.
- BusinessLIVE
Would you like to comment on this article?
Register (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Trending Now
Latest Videos