JOHANNESBURG - Economists on Wednesday said that they expect the South African Reserve Bank (SARB) to cut the repurchase rate (repo rate) by 25 basis points in a bid to stimulate economic growth.
The central bank had forecast in May that South Africa's growth would reach one percent in 2019. The reduction in repo rate would also trigger banks to decrease their interest rates to 10 percent as well, down from 10.25 percent.
In May, SARB's monetary policy committee (MPC) unanimously decided to keep the repo rate unchanged at 6.75 percent per year while economic growth forecast was revised down. Some MPC members were even keen to cut the repo rate in May already.
South Africa's central bank last raised the repo rate by 25 basis points in November to stem inflation pressures.
Annabel Bishop, Investec Bank chief economist, said while the SARB does not target inflation in the immediate term, consumer price index (CPI) inflation was expected to remain moderate in the foreseeable future.
"It has become the case in South Africa that the more moderate inflation environment has engendered lower inflation expectations, as the increase in the cost of living proves lower than in previous periods, often causing consumers to expect similar going forward, thereby entrenching lower inflation expectations," Bishop said.
"South Africa avoided a credit rating downgrade in the first quarter from Moody's, which is also likely to have made the SARB keener to cut interest rates.
"Eskom is in line for a large rescue package, which would be advisable to use upfront to reduce the quantum of the debt, and so the drain of regular coupon payments. regular coupon payments."
Lullu Krugel, PwC chief economist for Africa; and Christie Viljoen, strategy and economist at PwC, said although SARB was expected to reduce interest rates by 25 basis points, a 50 basis points cut would have been more appropriate.
A 50 basis points change in the SARB repo rate was often seen in the 2000s, but last observed in early 2014. Since then, the MPC has moved monetary policy in 25 basis points increments.
Krugel and Viljoen said a resilient rand seen in recent weeks, supported by the US Federal Reserve and European Central Bank (ECB) hinting at rate cuts, provided the SARB with sufficient room to ease monetary policy.
The MPC started its three-day meeting on interest rates on Tuesday, with a statement on its deliberations scheduled for Thursday afternoon.