Another interest rate cut is in the air as the monetary policy committee of the SA Reserve Bank met in Pretoria on Wednesday to review its monetary policy stance.
Experts predicted the body would opt to reduce the repo rate — at which money is lent to commercial banks — by at least one percent after its two-day deliberations.
This will enable commercial banks to drop their prime interest rate to 12,5%.
Economists were confident this would be followed by more cuts at the remaining two meetings of the committee.
First National Bank chief economist Cees Bruggemans predicted a prime interest rate of 12,5% by the end of the year.
”There are fundamental factors that argue for reducing interest rates and only the size and the timing of the rate cuts are at issue,” he said.
”I would expect the Reserve Bank will announce a one-percent cut in the repo rate on Thursday, although we may still be surprised with a 1,5%.”
Standard Chartered Bank chief economist Razia Khan agreed.
”While analysts are divided between the possibility of a cut of 100 or 150 basis points, we believe there is a good case for an aggressive cut of 150 basis points.”
Bruggemans and Khan expected the consumer price index less mortgage costs (CPIX) to continue sinking.
CPIX is the measure used by the Reserve Bank to determine its inflation targets, set at between three and six percent for this year and the next.
The year-on-year CPIX declined to 6,4% in June. Reserve Bank governor Tito Mboweni recently predicted the CPIX would fall within the central bank’s target range in the third quarter and stay there through next year.
The downward trend led the Reserve Bank last month to reduce its repo rate by a higher-than-expected 1,5%, triggering a prime interest rate cut of the same margin.
Kahn said on Wednesday: ”A cut of 1,5% now, followed by further cuts of one percent in October and November would be fully justified by the inflation outlook.”
Bruggemans expected the central bank to adopt a more measured approach to rate reductions.
While the rand remained steady, the country had low international reserves and the currency was still at the mercy of the markets.
Recent wage increases of 9,5% for civil servants and 12% for gold mine workers should also be taken into account.
”This suggests that the Reserve Bank will be moving more cautiously in making changes,” Bruggemans said. – Sapa