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 3–6% 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
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