Further Reserve Bank repo rate cut unlikely this year

The annual consumer price inflation (CPI) rate eased back in August to 3.1% from 3.2% in July.

Prices rose by 0.2% in August as the country relaxed the lockdown restrictions, which enabled increased economic activity. 

The slight drop in inflation may provide room for the South African Reserve Bank to reduce rates further in November. The central bank kept the repo rate at 3.5% in September after it cut rates by 300 basis points earlier this year. 

The monetary policy committee said that after its September meeting the quarterly projection model indicated no further rates cut soon, but two increases may be implemented in the third and fourth quarters of 2021.

Inflation is expected to average 3.3% this year and remain below the 4.5% mid-point of the Reserve Bank’s target range for the next two years. The central bank forecasts inflation to average 3.3% this year, 4% in 2021 and 4.4% in 2022.

In an interview on Wednesday with PowerFM, the governor of the Reserve Bank, Lesetja Kganyago defended its move to cut rates as part of its Covid-19 response. While the Reserve Bank continues to observe data in real time, Kganyago said the central bank has been “aggressive” in its response to the crisis. 

Based on this, Sifiso Skenjana, the chief economist at IQ Business, says the bank is unlikely to cut rates this year. 

“Philosophically [it] will likely be more conservative [and keep the repo rate on hold] despite the inflation showing demand-side weakness in the economy,” he says.

Although lockdown restrictions have been eased to help for the country’s battered economy to recover from the economic effects of the Covid crisis, the central bank estimates that gross domestic product (GDP) to contract by 8.2% in 2020. 

GDP is expected to grow by 3.9% in 2021 and by 2.6% in 2022, according to the Reserve Bank’s estimates. 

Considering the weak economic outlook, the Centre for Economic Development and Transformation’s Duma Gqubule said the central bank still has room to cut rates to support economic recovery. 

“We are in a depression by definition … and we can cut rates lower than what we have done,” he said. 

There is too little money chasing too much production so there can’t be inflation. If there is inflation it’s due to something else. There is no reason the rates can’t be cut to zero.” 

Statistics SA said in a statement on Wednesday that the monthly drop in inflation was largely driven by food and non-alcoholic beverages; housing and utilities; and miscellaneous goods and services. 

Transport was the most significant contributor to the 0.2% monthly increase in August, following a 1% rise in fuel prices. This was in line with the increase in oil prices at the end of July, which reached $43 a barrel. Inland, 95 octane petrol set back customers by R15.17 a litre in August, up from R15.12 in July. 

Food and non-alcoholic beverages hit a seven-month low of 3.9% in August, and contributed 0.7% to the total CPI for the month. 

This is down from 4.3% in July. Easing of the lockdown restrictions meant most items in the CPI basket, except for sports tickets, were permitted to be sold. 

In mid-August South Africa moved to lockdown level two, allowing for the sale of tobacco and alcohol, the sale of which was banned in late March when the country entered the hard lockdown. These items contribute 4.1% to the CPI basket in August. 

Big monthly increases in whiskey and wine prices pushed annual inflation for alcoholic beverages to a lockdown high of 2.9%. 

Thando Maeko is an Adamela Trust business reporter at the M&G

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