In a low-inflation environment, “interest rate cuts will certainly do no harm”, PwC said on Tuesday in the lead-up to the South African Reserve Bank (SARB) Monetary Policy Committee’s (MPC’s) decision on whether or not South Africa’s interest rates should be lowered.
There is already some appetite to do just this, the company said in a statement, particularly as the MPC is currently engaged in its first semi-monthly meeting of this year.
The implied path of interest rates – as generated by the central bank’s Quarterly Projection Model – indicated scope for one 25 basis points cut in the repo rate towards the third quarter of this year, PwC pointed out.
The past two months have seen several developments and data releases that support an interest rate cut sooner rather than later, PwC said in a statement on Tuesday.
The MPC in November said it expected inflation to average 4.1% in the fourth quarter of 2019, which meant that it was more likely to have come in at about 3.8% after Statistics South Africa’s (Stats SA’s) measured inflation of 3.7% year-on-year and 3.6% year-on-year in October and November 2019, respectively.
“There will certainly be some base effects on inflation readings during 2020’s first half [owing] to the strong disinflationary trend seen early last year,” PwC said.
“Nonetheless, an ongoing trend of below-expectation inflation numbers suggests that the SARB’s above 5% inflation forecasts for each of the four quarters in 2020 could be too lofty,” the company noted, adding that “lower inflation forecasts widen the door for a rate cut”.
Additionally, a stronger rand will support low retail inflation, PwC explained, noting that the rand had reached a five-month high late in December, breaking below the R15/$ level.
“The current reading at around R14.50 to the dollar is better than the R14.94 to the dollar that the SARB used for its inflation forecasts in November 2019,” the company said on Tuesday, highlighting that “resilience in the rand has been an important contributor to low inflation”.
Stats SA measured a 13.2% year-on-year decline in the cost of imported goods during October 2019, and this imported deflation contributed to retail inflation declining to just 2.9% year-on-year in October.
Another reason for low retail inflation is the inability of retailers to pass on price increases to consumers, PwC pointed out, explaining that, according to the Bureau for Economic Research, retail sector confidence declined to a 20-year low in the third quarter of 2019.
As a result, PwC believes “it is highly unlikely that the SARB will risk stirring higher inflation with a cut to the repo rate in 2020”.
Weak economic growth, however, still persists, the company lamented. Available forecasts collated by Focus Economics point to a median projection for real gross domestic product (GDP) growth to reach just over 1% this year – highly dependent on the frequency of load-shedding – from around 0.5% last year.
Manufacturing production is expected to rise by 0.7% after a decline of 0.4% in 2019.
An improvement in economic growth this year is also predicated on an expectation that fixed investment spending will increase following a pullback in investment during 2018 and 2019, PwC said.
As a result, economic growth of about 1% will certainly “not be too bad a performance” given the country’s recent economic trend. However, PwC warned that it was unlikely that economic expansion would reach the projected population growth rate of 1.3%, which would result in a sixth straight year of declining real GDP per capita.
“While the above helps to justify a rate cut this month,” PwC warned that the MPC might take a more prudent view and hold off any action until its next meeting in March, or even May.
The coming two months have a very full data calendar for the SARB to consider, the company said, noting that these include the 2020 budget speech, GDP data for the fourth quarter of 2019, a decision by the National Energy Regulator of South Africa on State-owned Eskom’s tariff increases this year, and Moody’s Investors Service’s next review.
“These events will have a direct impact on the SARB’s projections for inflation, economic growth and fiscal dynamics,” PwC said, adding that the MPC “cannot afford to get its assumptions wrong on these factors and would certainly be justified in holding off any monetary policy action until more is known on these factors”.
While PwC noted that “policymakers can also not afford to ignore the country’s economic crisis”, characterised by low growth and rising unemployment, it added that the SARB had repeatedly said it did not see monetary policy action as a solution to growth challenges.
“But in a low-inflation environment, interest rate cuts will certainly do no harm.”