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MPC preview: Rate cut justified … but taking no action would be prudent

15 January 2020 PwC

Inflation coming in below expectations
The South African Reserve Bank (SARB) Monetary Policy Committee (MPC) is currently engaged in its first semi-monthly meeting of 2020. At its previous meeting (in November 2019), the MPC opened the door for an interest rate cut this year. The implied path of interest rates - as generated by the central bank’s Quarterly Projection Model - indicated scope for one 25 basis points cut in the repo rate towards the third quarter of 2020. The past two months have seen several developments and data releases that support an interest rate cut sooner rather than later.

The MPC said in November it expects inflation to average 4.1% in 2019Q4. This mean is now more likely to come in around 3.8% after Statistics South Africa (Stats SA) measured inflation of 3.7% y-o-y and 3.6% y-o-y in October and November 2019, respectively. There will certainly be some base effects on inflation readings during 2020H1 due to the strong disinflationary trend seen early last year. Nonetheless, an ongoing trend of below-expectation inflation numbers suggests that the SARB’s above-5% inflation forecasts for each of the four quarters in 2020 could be too lofty. Lower inflation forecasts widen the door for a rate cut.

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