Interest rate cut expected on Thursday

The SA Reserve Bank (Sarb) is likely to cut interest rates by 25 basis points to 6.5 percent when its monetary policy committee (MPC) meets on Thursday due to moderating inflation.

Statistics South Africa's consumer price inflation data released last month showed that headline inflation eased to 4.6 percent year-on-year in July, from 5.1 percent in June.

This was as a result of the welcome downturn in food costs, electricity and fuel prices.

Research analyst at Nomura, Peter Attard Montalto, said last week: "The Sarb MPC looks likely to cut rates by 25 basis points (bps) at its meeting on Thursday as the doves seem to have grown tired of waiting for risk events while the hawks are still willing to be patient. However, the doves are in the majority."

Montalto said: "It comes down to risk aversion or not. The doves are more risk-loving in terms of monetary policy action than we think could be justified in future."

The reasons for cutting "are still marginal, however, as most weak growth is structural and, given the risks on the horizon, at best it looks like an attempt to do what little they can to support growth, when they can, in a minimal way".

Kamilla Kaplan, an economist at Investec, said this week's MPC meeting was expected to see a further easing in interest rates by 25bps to 6.5 percent, as consumer prices index inflation, and hence inflation expectations, moderated.

"There is a marginal possibility of a 50bps cut if the Sarb aims to front-load easing," she added.

FNB senior economist Mamello Matikinca said after falling 4.6 percent year-on-year in July, inflation should have risen 4.9 percent, largely on the back of a low base in last year's fuel inflation print. However, she warned that meat prices were likely to have continued to limit the moderation in overall prices.

"The committee is likely to look through the August inflation data and note that inflation is set to begin moderating again in the fourth quarter. Should the bank opt for a more cautious approach and not lower rates? we expect them to cut (in) November."

Stubborn meat prices come on the back of the outbreak of bird flu and the cattle restocking process, due to the drought.

Moody's had welcomed the rate cut, saying it would support the short-term economic growth recovery, but the decision to cut rates coincided with "political pressure on Sarb's independence and mandate".

Business Report

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