After slashing its key lending rate by 300 basis points to 3.5% in 2020, the South African Reserve Bank (SARB) finds itself in an unusual position. It has scope for yet another rate cut, even in the face of a strongly rebounding economy. 

The case for a cut is backed by a range of data. Consumer inflation, or CPI, slowed to 3% in September from 3.1% in August, the very bottom of the SARB’s 3%-6% target range — and the inflation outlook is generally subdued. Oil prices remain depressed and are expected to stay that way, with accountancy firm PwC forecasting that demand for the fossil fuel will never again reach 2019 levels. Meanwhile, political uncertainty in the US over the election result and Donald Trump’s dangerous behaviour have rattled the dollar, which in turn is supportive of the rand, as are other trends.

“… an increasingly bullish outlook for the global capital expenditure cycle (and hence commodity prices) over the next 12 months bodes well for emerging market commodity currencies,” NKC African Economics said in a note. 

The retail sector, with some notable exceptions, is in the doldrums, though recovering. Retail trade sales were down 4.2% year on year in August. The September read will be published on Wednesday and improvements are expected, with the lifting of the booze ban playing a role. 

Then there is the festering issue of unemployment. With an official jobless rate of 30.8% — or more than 43% under the expanded definition, which includes discouraged jobseekers — demand pressures in the economy are exceptionally weak. Lacking a steady income is a big hindrance (in most cases) to spending. 

Interestingly, a rate cut now will probably be in the face of an economic rebound, which would generally give a central banker pause. But that is off an exceptionally low base after the second-quarter collapse, when the economy contracted 51% — and the recovery needs all the help it can get.

Still, the consensus is that the SARB will hold fire for now. 

“The primary concerns preventing further monetary loosening are the country’s fiscal position and, more specifically, the impact that lower interest rates will have on the attractiveness of government debt,” NKC African Economics said. So, the souring fiscal outlook is an impediment to monetary policy. 

First National Bank made the same point, saying in a note that the “SARB is likely to take a cautious approach, given recent events, including the higher official debt-to-GDP forecast… and the commensurate deterioration in South Africa’s sovereign risk profile”.

At least no one expects interest rates to be hiked on Thursday. BM/DM