The pros and cons of an interest cut in South Africa this year
As South Africa’s Monetary Policy Committee (MPC) meets for the first time in 2020, PwC analysts Lullu Krugel and Christie Viljoen believe that the body might sway in either direction with respect to interest rate cuts, a policy measure that was opened for consideration in November last year.
Rate cuts are being considered primarily as a balancing measure against inflation rates, which have risen to an average of more than 4% towards the end of last year. Recent predictions expect rates to drop somewhat in the near future, pushing the MPC to consider a possible cut in interest rates.
Nevertheless, there remain experts who are weary of increasing interest rates, as it risks a further jump in inflation. When an interest rate cut went up for a vote in the MPC in November when the committee last met, there was a three-two split in the panel in favour of no rate cuts.
Given that the difference was only one committee member, PwC analysts believe that the MPC might quite possibly deliver a rate cut imminently. Factors in support of the cut include a marginal strengthening of the Rand over recent months, with the currency reaching a five-month peak in December.
On the other hand, South Africa is currently facing a number of challenging economic conditions, which might weigh against a rate cut. Research and consulting firm Intellidex recently revised its growth forecast of the South African GDP for the worse, and the World Bank has done the same.
According to PwC, factors on both sides might even drive the South African Revenue Board (SARB) to put off the decision shortly, as it waits for more economic conditions to unfold.
“These include the 2020 budget speech (third week of February), GDP data for 2019Q4 (first week of March), a decision by the National Energy Regulator of South Africa (Nersa) on Eskom’s tariff increases this year (by mid-March), and Moody’s Investors Service’s next review (March 27),” wrote Krugel & Villjoen, senior economists at PwC Strategy&.
“These events will have a direct impact on the SARB’s projections for inflation, economic growth and fiscal dynamics. 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. Policymakers can also not afford to ignore the country’s economic crisis – low growth and rising unemployment. The SARB has repeatedly said that it does 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,” they added.
