The decision by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) on 17 July to reduce the repo rate by 0,25% from 6,75% to 6,50% has sparked a debate on possibilities of future reductions in interest rates.
“The SARB through its MPC has the mandate and responsibility to keep the inflation rate between the target band of 3 to 6%,” says Prof Danie Meyer, director of the North-West University’s (NWU’s) Trade and Development (TRADE) research entity.
“Since the introduction of the target band in the early 2000s, the SARB has successfully managed to keep the inflation rate mostly within the band.”
He says the monthly inflation rate for 2019 has move from 4,0% to the midpoint of the target band of 4,5% in May 2019. Since the MPC’s decision to reduce the repo rate, the latest inflation data have been released and the main outcome was that inflation has remained constant from May to June at 4,5%.
“From this information the MPC should keep the repo rate constant at their next meeting planned for 19 September 2019. Or should they keep it at 6,5%?”
According to Prof Meyer there are many factors indicating to a follow-up reduction in interest rates. Firstly, inflation is relatively low and at 4,5% at the mid-point of the target band with no demand-pull inflationary pressures. Inflation is driven by cost factors such as the petrol price, medical costs, electricity and food prices and municipal accounts.
“It is predicted that inflation will decline in July due to lower fuel prices. Secondly, the economy is in dire need of a further boost after the shocking GDP growth data for the first quarter of 2019, at -3,2%, which brought back fears of a new recession,” he adds.
Prof Meyer says the original reduction of only 0,25% in July will not have a significant positive impact on the economy, but a further reduction could have.
“The SARB understands the difficult position of the economy and has reduced the GDP prediction for 2019 from 1,0% growth to only 0,6%.
“A third reason for a reduction in the repo rate is that the US Central Bank (the FED) is meeting on 31 July 2019 and all expectations lead to a rates cut in the United States (US). This will result in the real interest rate differentiation between the US and South Africa staying constant which will prevent large scale outflows from South Africa.”
Prof Meyer explains that lastly, looking at the Producer Price Index (PPI), which is a leading indicator for the inflation rate, the PPI rate has declined from 6,4% in May to 5,8% in June.
“The PPI is a measurement of the change in prices of goods as they leave the factory or as they enter the production process. Taking the above issues into account, it is anticipated and predicted that the inflation rate for July will settle at between 4,2% and 4,4%, thereby lower than the June rate of 4,5%. In addition, the MPC should then be in a position to lower the repo rate again at the next meeting in September 2019 by another 0,25%.”
Prof Danie Meyer.
