Rate Cuts in 2017? What are the Odds?

The South African Reserve Bank (SARB) can’t yet call the end of its interest rate-increase cycle, even as the risks to inflation have eased since the Monetary Policy Committee’s (MPC) January meeting, Governor Lesetja Kganyago said: “It’s too early for me to make the call as to whether we are still on the tightening cycle or not, we can’t say that the increase-cycle is now over.”

Kganyago said in November the MPC may be close to the end of the tightening cycle in which it raised the benchmark lending rate by 200 basis points over two years to 7% by last March. This was in a bid to bring price growth back to within the government’s target band after being outside it for most of last year as a drought raised food prices and the rand reached record lows. The MPC, which will announce its next policy move on *30 March 2017*, targets inflation between 3% and 6%. Price growth eased to 6.6% in January, the first slowdown in five months, and five-year breakeven rates, a measure of inflation expectations, fell to the lowest since April 2015 on Friday. Oil and food price still pose risks, Kganyago said.

The risks to inflation have “definitely been mitigated compared to the previous policy-setting meeting,” he said. “Clearly, the recovery of the currency helps, but the rise in oil prices doesn’t help. Clearly, the good rains help and the price of grains will come down, that helps, but that farmers are restocking their herds and meat prices remain high, doesn’t help.”

Economic growth in Africa’s most industrialised nation slumped to 0.3% for 2016, lower than government and central bank estimates, and the slowest rate since a recession seven years earlier. The SARB forecasts the economy to expand 1.1% this year, and 1.6% in 2018, but there is still a significant downside to growth, Kganyago said.

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