Inflation accelerating to above the lower end of the Reserve Bank’s target range for the first time since the severest phase of the Covid-19 lockdown will not prevent further interest-rate cuts, according to economists.
That was because a weak economy, which some said might have shrunk by about 50% in the second quarter, will keep a lid on price increases, enabling the Reserve Bank to add to the 300-basis points of cuts in 2020 so far, which have left the main rate at the lowest level in about half a century.
SA’s annual inflation rate jumped to 3.2% in July, up from 2.2% in June, and the highest since being 3% in April, according to Statistics SA data released on Wednesday.
That was above the median forecast of 3% based on a Bloomberg survey, and reflected an uptick in oil prices after sharp declines when much of the global economy closed down from March.
While SA has since opened most of the economy with the move from level 2 of the lockdown, the outlook remains grim. The Bank expects a GDP contraction of 7.3% for 2020, the most since at least the Great Depression about a century ago.
Some private sector economists expect the contraction to be in double digits, with inflation set to stay below the midpoint of the Bank’s 3% to 6% target.
Investec chief economist Annabel Bishop said data on September 8 might show that the economy — which was in recession even before Covid-19 hit — had contracted about 50% in the second quarter.
Old Mutual Investment Group chief economist Johann Els said he expected inflation to stay between 2.5% to 3% at least until March 2021.
"That means there might still be room for the Bank to cut rates by another 25 basis points (bps) to 50bps this year," he said.
"If we look into next year, the fact that inflation could remain below 4.5% means we shouldn’t expect significant rate increases. Maybe towards the end of next year the Bank can start to normalise rates," he said.
The Bank cut the repo rate to 3.5% this year at its July monetary policy committee meeting and said that it expected inflation to average 3.4% in 2020 and 4.3% in the following two years. It has still come under attack from critics who accuse it of not doing enough, despite the rate reduction and other steps such as making it easier for commercial banks to lend to stricken households and businesses.
The market reaction was muted, with SA bonds slightly weaker in line with their international counterparts ahead of the Jackson Hole economic policy symposium, which will be addressed by Federal Reserve chair Jay Powell on Thursday.
The yield on the generic 10-year bond, which moves inversely to the price, rose 3 basis points to 9.31%, while the rand was 0.6% lower at R16.9622/$, ending a six-day run of gains.
"Core price pressures are likely to stay subdued as a large output gap persists," said Virág Fórizs from Capital Economics, who has pencilled in two further cuts of 25 basis points from the Bank during 2020.
"If we’re right on the inflation outlook and the economic recovery being weaker than the Bank currently expects, further easing seems likely."
Independent economist Elize Kruger said the second quarter GDP number would be key in the Bank’s assessment of whether the economy needs more stimulus.
"A further cut in interest rates will only be on the table in my view if the Bank revises its GDP view to reflect a notably weaker outlook for 2020 and beyond," she said. The Bank is next due to decide on policy on Septem-
ber 17.
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