This is not a paywall.

Register for free to continue reading.

The news sucks. But your reading experience doesn't have to. Help us improve that for you by registering for free.

Please create a password or click to receive a login link.

Please enter your password or get a login link if you’ve forgotten

Open Sesame! Thanks for registering.

First Thing, Daily Maverick's flagship newsletter

Join the 230 000 South Africans who read First Thing newsletter.

We'd like our readers to start paying for Daily Maverick

More specifically, we'd like those who can afford to pay to start paying. What it comes down to is whether or not you value Daily Maverick. Think of us in terms of your daily cappuccino from your favourite coffee shop. It costs around R35. That’s R1,050 per month on frothy milk. Don’t get us wrong, we’re almost exclusively fuelled by coffee. BUT maybe R200 of that R1,050 could go to the journalism that’s fighting for the country?

We don’t dictate how much we’d like our readers to contribute. After all, how much you value our work is subjective (and frankly, every amount helps). At R200, you get it back in Uber Eats and ride vouchers every month, but that’s just a suggestion. A little less than a week’s worth of cappuccinos.

We can't survive on hope and our own determination. Our country is going to be considerably worse off if we don’t have a strong, sustainable news media. If you’re rejigging your budgets, and it comes to choosing between frothy milk and Daily Maverick, we hope you might reconsider that cappuccino.

We need your help. And we’re not ashamed to ask for it.

Our mission is to Defend Truth. Join Maverick Insider.

Support Daily Maverick→
Payment options

Reserve Bank is likely to cut rates, but how low can it...

Business Maverick

Business Maverick

Reserve Bank is likely to cut rates, but how low can it go?

The consensus among economists polled by Reuters is for a 25-basis point rate cut to 6.5% when the SARB’s Monetary Policy Committee makes its announcement on Thursday 18 July. (Photo: Adobe Stock)

The SA Reserve Bank is widely expected to cut rates this week, with most economists expecting a 25 basis point cut. With a stagnant economy, there should be a lot more room for monetary loosening, but there probably isn’t, given the economy’s structural challenges.

South Africa’s main CPI inflation rate in May was a relatively moderate 4.5%, but a glance at other data would suggest it should be far slower. The official unemployment rate is north of 27% and most analysts reckon it is, in reality, closer to 40%, so in theory at least there should be little in the way of upward wage pressures in the economy. Demand is subdued, to say the least, with retail sales rising a modest 2.4% in April year-on-year. And the economy contracted an eye-popping 3.2% in the first quarter, with little overall growth seen this year.

In such an environment, one would expect inflation to be much lower. But South Africa is not a classic textbook case for Economics 101, with deep structural issues, such as labour market rigidity and wage hikes that appear to blithely ignore the realities of unemployment. Along with the volatility of the rand and factors such as global oil prices, inflation in South Africa can be hard to contain, and when it does appear contained, its trajectory can be tough to forecast. If you know where the rand exchange rate will be in six months’ time, or what the oil price will be, then you are six months from retirement.

There is not a huge amount of scope for cuts here South Africa is still an emerging market which needs some real rate buffer, with increasing fiscal and SOE risk, whilst there are global risks as well,” Peter Attard Montalto, the head of capital markets research at Intellidex, told Business Maverick.

The consensus among economists polled by Reuters is for a 25-basis point (bp) rate cut to 6.5% when the SARB’s Monetary Policy Committee (MPC) makes its announcement on Thursday 18 July. A couple of economists have made the case for a steeper cut.

While the SARB had previously expressed its preference for small moves, arguing that rate moves of 25bps at a time are appropriate given current interest rates, we believe that conditions may now favour a one-off, larger adjustment to the repo rate. We now see a high likelihood of a 50bps repo rate cut to 6.25% … and a 25bps hike at the November 2019 MPC meeting,” Razia Khan, chief economist for Africa and Middle East at Standard Chartered Bank, said in a recent note.

With inflation currently well-behaved and survey evidence supporting a gradual decline in inflation expectations, we believe there is room for monetary policy to provide more stimulus,” Khan noted.

Politics are also at play here and in this context, the SARB will likely take a cautious approach. With other central banks, notably in Turkey and the US, under political pressure to cut rates – and the political backdrop here of calls from within the ANC to “expand” the SARB’s mandate to include employment and growth, which it already pays attention to – expect the SARB to assert its independence.

Still, given the dire state of the economy, 50 bp is not unreasonable – it’s hardly going to trigger a stampede to the malls or light a fire under inflation, which is comfortably within the SARB’s 36% target range. The real question is what it does beyond Thursday. The Q2 GDP data, due on 3 September, will probably give the best clues to its direction for the rest of the year. BM


Please peer review 3 community comments before your comment can be posted