The Charts Showing Why South Africa's Central Bank May Cut AgainBy
Inflation is near the middle of the Reserve Bank’s 3%-6% band
Economic growth predicted at less than 1% for the year
If South Africa’s central bank cuts interest rates again this week, don’t accuse it of doing so for the sake of “socioeconomic well-being.”
The institution has been fighting off a bid by the nation’s anti-graft ombudsman to change its mandate from targeting inflation to focusing on the financial health and quality of life of its citizens. But officials might be about to deliver their second rate reduction this year, a move that could inadvertently conform to that alternative agenda.
Reserve Bank policy makers in Pretoria will emphasize that a cut, anticipated by almost all economists surveyed by Bloomberg, is intended to revive economic growth at a time when inflation is well within its target range. That would chime with the insistence of Governor Lesetja Kganyago that the bank won’t bow under political pressure. He has launched an aggressive legal counter-attack to the ombudsman’s move.
Of 21 economists surveyed, 17 predict a quarter-point reduction to 6.5 percent while one, Colen Garrow at Meganomics, says officials will deliver a half-point cut. The Monetary Policy Committee lowered borrowing costs for the first time in five years in July. These charts show it may be about to do so again.
The inflation rate fell to a 21-month low of 4.6 percent in July and a government report on Wednesday showed it stayed within the target range last month, even though the rate increased. While the central bank says the rand is a key risk to its outlook and it’s been the most volatile among major and emerging-market currencies tracked by Bloomberg this year, price growth slowed as predictions of a bumper corn crop limited food-cost increases.
The five-year breakeven rate, a measure of inflation expectations, has fallen 105 basis points since the start of 2017 and was close to a 2 1/2-year low on Tuesday.
The rand strengthened 0.5 percent to 13.2539 per dollar by 1:02 p.m. on Wednesday in Johannesburg.
Africa’s most-industrialized economy is projected to expand well below 1 percent this year, even after it emerged from a recession in the second quarter. Business confidence is at the lowest in more than three decades and retail-sales growth slowed to 1.8 percent in July.
“The cutting is really just to help the consumer right now,” Kevin Pretorius, a director at KADD Capital (Pty) Ltd., said by phone from Johannesburg. “Inflation has come down, but it hasn’t come down to the middle of the band where they would feel really comfortable. The problem is that growth has completely fallen off.”
Forward-rate agreements starting in nine months, used to speculate on borrowing costs over the period, show investors are pricing in almost half a percentage point of rate cuts by the middle of next year.
“There’s still a window for the Reserve Bank to cut in order to provide further relief for the South African economy,” Kevin Lings, the chief economist at Stanlib Asset Management Ltd. in Johannesburg, said by phone. “They raised interest rates by 200 basis points from the low and I think the Reserve Bank will give back some of that, but I don’t think they’ll give back the full 200 basis points.”
— With assistance by Simbarashe Gumbo