South Africa’s Reserve Bank will cut its repo rate by 25 basis points to 6.50% just days after Moody’s is expected to give the country another chance to reform its finances, a Reuters poll found on Tuesday.
Fifteen of 22 economists said the Bank would cut interest rates by 25 basis points on March 28, while two pencilled in a 50 basis-point cut. The remaining five said there would be no change.
“Politically a 25 basis-point cut could be seen as the SARB contributing to boost the economy towards growth and employment creation, and it will go some way to help offset the impact of the VAT increase,” said Elize Kruger, senior economist at NKC African Economics.
The central bank cut the repo rate by a quarter of a percentage point to 6.75% in July and if cut this month it is expected to remain at 6.50% until the end of next year.
South Africa will learn soon whether Cyril Ramaphosa’s first month as president has helped the country hold onto its last investment grade rating.
Following downgrades by S&P and Fitch, Moody’s publishes the results of its review on March 23. All but two of 18 economists said South Africa would avoid a credit rating downgrade.
A cut to junk by Moody’s would see South Africa removed from Citi’s influential World Government Bond Index (WGBI), triggering up to R100 billion ($8.3 billion) in selling by foreign investors.
“We expect Moody’s to leave its ratings unchanged this month,” said Peter Attard Montalto, emerging market economist at Nomura International.
South Africa’s central bank expects a value-added tax (VAT) hike to lift inflation by around 0.6 percentage points over the coming year, though it doesn’t expect to raise interest rates.
Kruger at NKC African Economics said the bank has the option of rewarding the economy with a bit of stimulation by looking through the VAT hike as an exogenous one-off development and focusing on the impact of the rand appreciation.
Or the bank could be conservative and use the VAT hike as a reason not to cut rates, she said.
Inflation is expected to average 5.0% this year and quicken slightly to 5.1% next year, compared with last month’s respective forecasts of 4.8 and 5.2%.
“Given the level of current inflation and expected future inflation, as well as the need to grow the economy, now would be the right time to decrease rates by 25 basis points,” said Frank Blackmore, economist at EF Consult.
Projections for growth have improved, with the economy now expected to expand 1.6% this year, faster than 2017’s 1.3%. Last month, 2018 growth was seen at 1.4%.