Sarb to pause cutting on September 17, trim in November – poll

South Africa’s Reserve Bank will pause in easing its repo rate next week and cut it by a quarter of a percent to 3.25% in November to cushion a deep pandemic-driven economic contraction before inflation resurfaces, a Reuters poll found on Friday.

Following 300 basis points of SARB cuts this year, a poll taken in the past week showed 15 economists saw the repo rate on held on Thursday while 10 predicted a modest 25 basis point cut to 3.25%.

However, the survey median shows rates will be cut in November for the last time in this cycle before the Sarb begins raising rates to 3.50% in either July or September.

“The Sarb still has room for another rate cut worth 25 basis points, but this will be contingent on data,” wrote Citi’s Luis Costa.

Costa cautioned that space for further cuts is narrow due to the structure of government spending.

Stagflation — persistent high unemployment and inflation with weak or no economic growth — was a problem familiar to South Africa’s citizens and policymakers before disinflation took hold in the past two years.

Inflation sank to its lowest in more than 15 years in May at 2.1%, but is back on the rise even as the economy, already weak before the coronavirus pandemic, reels from shutdowns and weak consumer demand.

“We have increased our forecast for 2020 inflation to 3.6%, as the recent jump in inflation to 3.2% indicates inflation will likely rise above 4% by year-end. That would imply negative real rates, which are a major concern for the central bank,” said Francesca Beausang of Continuum Economics.

Beausang added that given the scale of the South African recession, a rate hike was unlikely any time soon.

For his part, Sarb governor Lesetja Kganyago has made it clear he is not excessively concerned about upside inflationary developments over the next 18 months as they are already built into the central bank’s forecast.

Inflation is expected to average 3.3% this year and quicken to 4.2% in 2021, according to the latest Reuters poll, slightly higher than last month. Economists attribute this to the rest of global economic activity picking up after lockdowns end and little to do with domestic demand.

South Africa’s economy shrank a staggering 51% in the second quarter on a seasonally-adjusted, annualised basis. The poll showed the economy contracting 8.5% this year as a whole, 0.5 percentage points weaker than last month’s median.