Deficit data eases pressure on Reserve Bank

Pressure has eased on the Reserve Bank to raise interest rates this week as better-than-expected key economic data has boosted hopes for rate cuts later this year.

An improvement in the trade deficit, which results in cheaper imports and an easing of high inflation, coupled with a stronger rand bode well for deliberations when the monetary policy committee meets from Tuesday to Thursday.

Economists believe interest rates may have peaked and the next move is downwards.

The committee has kept rates steady for the past 12 months, following sustained increases between January 2014 and March last year, which resulted in a cumulative increase of 200 basis points.

Elna Moolman, an economist at Macquarie Securities, said economists were likely to pay more attention this week to "whether the [Reserve Bank's] rhetoric becomes less hawkish".

A less hawkish Reserve Bank will strengthen Macquarie's prediction of two 25-basis-point rate cuts at each of the last two committee meetings of 2017, in September and November. But crucial to this was that inflation slowed to 5.5% and remained around 5% for a prolonged period, she said.

A hawkish stance favours higher interest rates, and potential global and domestic political risk may provoke this. The current expectation is for a dovish stance, although rate cuts are predicted only for the second half of this year.

"In the near term, the Reserve Bank will probably remain cautious about the sustainability of the rand's strength and it will therefore be reluctant to cut interest rates soon," said Moolman.

Inflation was expected to average just over 5% next year.

On Wednesday, data published by StatsSA showed that inflation had begun its descent. For February, inflation eased to 6.3% from January's 6.6%. But even as food inflation slowed, there was a slight uptick in insurance costs because of higher medical aid premiums. The market had expected inflation to be around 6.4%.

David Faulkner, an economist at HSBC, said: "After keeping rates unchanged over the past year, the stronger rand, moderation in recent CPI [consumer price index] readings and an improved current account deficit should support rates being kept unchanged."

The current account narrowed from a revised 3.8% of GDP in the third quarter of last year to 1.7% by the end of the year - its best level since 2010.

On Wednesday, the Reserve Bank said this was the result of stronger export volumes and favourable terms of trade.

The decline of the deficit on the income account allowed the current-account shortfall to narrow to an almost six-year low, Faulkner said.

Last week S&P Global Ratings forecast that emerging markets, including South Africa, may return to a hawkish stance in 12 to 18 months.

This depends on the degree of uncertainty over US monetary policy over the coming months.

Nedbank economists said in a research note that for the rest of the year at least consumers can expect rate cuts.

"Should the currency hold up ... then our baseline view is that interest rates have probably peaked, with the next move by the Reserve Bank likely to be down.

"We expect the monetary policy committee to start easing monetary policy in the second half of the year."