Reserve Bank rate cut rests on inflation below 6% over the next few years

Reserve Bank governor Lesetja Kganyago said those who expected a cut later in 2017 were “running ahead of themselves”. The committee was still uncomfortable that the Bank’s inflation forecast was in the upper end of the 3%-6% target range, he said.

He cautioned the committee had to focus on the outlook over 12-18 months. Markets should look at the 2018 and 2019 inflation forecasts.

The Bank now expected 2017 inflation to average 5.7%, down from 5.9% at the time of the committee’s March meeting.

Lower international oil prices and lower electricity price increases helped to lower the forecasts, even though the Bank had lifted its 2017 and 2018 food price inflation forecasts.

The Reserve Bank saw the outlook for the South African economy as being weaker than before, with the recent ratings downgrades likely to curb domestic investment spending.

It has cut its growth forecasts by 0.2 percentage points in 2017 and 2018, with the economy expected to grow at 1% in 2017, rising to 1.5% in 2018 and 1.7% in 2019. The Bank’s revised 2017 forecast is in line with that of the IMF, which recently raised its forecast to 1% from 0,8%, but it is now at the optimistic end of expectations, with many economists projecting growth of well below 1% in 2017.

Asked if the Bank had come under any pressure to revisit the inflation targeting policy, Kganyago said it had not.

Source