Online Reporter
South Africa’s tame inflation has created room for the central bank to cut interest rates at each of its three remaining meetings this year, according to Goldman Sachs Group and Investec Bank.
Annual inflation inched up to 3 percent in June from 2.8 percent in May, data on Wednesday showed. That was less than the 3.1 percent median estimate of 12 economists in a Bloomberg survey.
Inflation has now been below the 4.5 percent midpoint of the South African Reserve Bank’s target range, where it prefers to anchor expectations, since August. The central bank’s benchmark rate is currently 7.25 percent and the monetary policy committee will announce its next rate decision on July 31.
Goldman Sachs sees the MPC lowering its policy benchmark rate by a cumulative 75-basis point to 6.5 percent by year-end if the central bank’s inflation target is kept unchanged. It is in talks with National Treasury to have it adjusted lower.
“We’ve pencilled in back-to-back cuts,” Andrew Matheny, senior economist at Goldman Sachs, told Bloomberg. Policymakers are likely to consider low price growth, declining inflation expectations and the need to support the economy, he said.
Growth has averaged less than 1 percent a year for more than a decade.
Investec’s Chief Economist Annabel Bishop also believes there is scope for the MPC to reduce interest rates.
Additional cuts of at least 1 percent are warranted, given the neutral interest rate — where borrowing costs are neither stimulating nor weighing on the economy — is about 2 percent above inflation, and demand is weak, she said. “The Sarb has room to cut at each remaining meeting this year and should do so.”
Still, Bishop warns that the MPC’s caution may only yield one more cut this year. Either at the July MPC meeting, or later in the year and a further 25 basis point reduction next year, she said. — Bloomberg
