MPC update: The SARB cuts interest rates by 25bp as risks to inflation outlook seen to be reduced as SA avoids a Moody's rating downgrade

27 Mar 2018

Annabel Bishop

Chief Economist

Figure 1: SA Consumer Inflation: history and forecasts
  • The SARB has cut the repo rate by 25bp to 6.50% in an almost equally divided 4 –3 vote. This was in line with economists’ expectations.
  • Risks to the inflation outlook have moderated since the January MPC while according to SARB “ the increase in the value-added tax (VAT) rate to 15% places temporary upside pressure on inflation, this is mitigated by the stronger exchange rate which has contributed to the changing inflation risk profile”.
  • The rand has appreciated by around 3.5% on a nominal trade weighted basis, since the last MPC meeting as domestic market sentiment has been favourably influenced by recent events, including Cyril Ramaphosa’s election as president of the country, a more fiscal friendly March budget and the avoidance of a sovereign downgrade by Moody’s rating agency accompanied by a change in outlook from negative tostable.
  • Also assisting the rand has been the substantial increase in international commodity prices, coupled with the continued strengthening in global economic activity.
  • Year-on-year inflation rate, as measured by the consumer price index (CPI), logged 4.0% in February, down from 4.4% previously, primarily supported by lower food and fuel price inflation.
  • The MPC noted that “Although the bottom on the inflation cycle has likely been reached, the trajectory of headline inflation is forecast to remain within the target range, with core inflation expected to remain below 5% for most of the forecast period”.
  • The main changes to the SARB’s inflation rate forecast are the VAT increase and the exchange rate. According to the SARB “(the) VAT increase is expected to add about 0.6% percentage points to the headline inflation trajectory for the four quarters from the second quarter of 2018, with marginal second round effects persisting into subsequent quarters. The improved exchange rate has softened the impact of the indirect tax adjustments on the inflation forecast”.
  • However, the rand, along with the broader emerging currency complex is also vulnerable to a faster than expected pace of monetary policy normalization by the Fed that could trigger a reversal in capital flows to emerging markets, and a higher CPI inflation trajectory.
  • Outputs from the committee’s Quarterly Projection Model have changed. While previously “two or three increases of 25bp each by the end of 2019 were indicated, one increase of 25 basis points is now implied”, with two further lifts projected for 2020.
Figure 2: SARB CPI inflation forecasts (% y/y)
Figure 3: South African local and foreign currency long-term sovereign credit ratings

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