South Africa’s Reserve Bank expected to cut rates on July 18

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By  Emmanuel Okara

The South African Reserve Bank is likely to cut interest rates by a quarter of a per cent next week.

The move is in response to a slowdown in the economy during the first three months of the year, and fear that the situation could turn worse if left unchecked, a Reuters poll showed on Thursday.

South African bank notes featuring an image of former South African President Nelson Mandela are displayed at an office in Johannesburg file. REUTERS/Siphiwe Sibeko

Twenty-four of 30 economists in the survey taken over the past three days said the rate would be cut by 25 basis points to 6.50 per cent on July 18.

Two expected a cut of 50 basis points. The other four said rates would be left unchanged.

“Conditions in South Africa have been shifting in favour of a rate cut for some time,” said Razia Khan, chief economist for Africa and Middle East at Standard Chartered Bank.

Economists assigned a median 60 per cent probability rates would be cut on July 18, even though inflation is expected to average 4.5 per cent this year, the centre of the Bank’s three per cent to six per cent target range.

The median forecast for economic growth was 0.7 per cent for this year. That is 0.1 percentage point higher than last month’s median, when economists lowered their forecasts because of a quarterly 3.2 per cent contraction when the year began.

South Africa’s private sector has been shedding jobs recently, including in the interest-rate-sensitive banking industry where banks have already cut or announced plans to cut staffing.

Khan, who predicted a 50-basis-point cut next week said the daily drip-feed of retrenchment headlines should in theory make little difference to the SARB because it is the economic outlook that matters to it.

“The reality, however, is that it does impact psychology and people expect, especially with inflation well-behaved that the SARB should be in a position to react to their perception that the economy is weak,” Khan said.

Senior officials in the ruling African National Congress party have argued in recent months over whether the Reserve Bank’s mandate should be broadened to explicitly include job creation and economic growth alongside price stability.

Joblessness rose to 27.6 per cent in the first quarter, official data showed in May, underscoring the task faced by President Cyril Ramaphosa after the ANC, his party won re-election in June.

An expanded category of unemployment, including people who have stopped looking for work, rose to 38 per cent in the first quarter from 37 per cent in the previous quarter.

This trend is also affecting services. Local banks have been automating their services to clients, cutting the number of face-to-face interactions and digitising services.

Khan said monetary policy will not be able to reverse structural trends like automation, nor should it even try to.

However, economists said growth would accelerate to 1.4 per cent next year in line with June’s poll.

“Looser policy will help to boost growth in South Africa in 2020,” said John Ashbourne, a senior economist at Capital Economics.

Still, gross fixed capital investment continues to dampen the outlook for growth. One economist predicted a 0.2 economic contraction for the full year as they don’t expect private-public infrastructure spending to show up soon. (Reuters/NAN)