Interest rates cut expected later in year

07 March 2017

Old Mutual Investment expects the South African Reserve Bank (Sarb) to cut interest rates by 50 basis points in the second half of the year due to a stabilising rand and lower inflation outlook, it said yesterday.

Old Mutual Investment's senior economist, Johann Els, said the first half of the year was likely to be tough, due to the tax hikes announced by Finance Minister Pravin Gordhan last month, but things would look up in the second half of the year.

"The Budget might seem a bit harsh for consumers, but this will be balanced by lower inflation and interest rates in the second half of 2017, with real wage growth and some job growth," Els said. The next policy meeting of the Sarb is set for March 30.

Gordhan last month announced increases in personal income tax of R16.5 billion for the 2017/18 financial year, as economic growth stutters and revenue collection falls short of expectations.

Gordhan at the time said that the Treasury anticipated gross domestic product (GDP) to grow 1.3 percent this year and was expected to improve moderately to 2 percent in the medium term. pointed at rates cuts later in the year, such as the falling agricultural prices and the National Energy Regulator granting Eskom only a 2.2 percent increase in tariffs.

"There are a lot of indicators pointing at falling interest rates, but a lot would also depend on how the US interest rates would play out in the year.

"An important factor will be if Gordhan stays in his position as the finance minister his removal would cause inflationary pressures," Jammine said.

Statistics SA said last month the inflation rate for January had moderated to 6.6 percent from 6.8 percent seen in December.

Compared with December, producer inflation was up 0.4 percent in January.

In addition, Stats SA said the annual Consumer Price Index rate for January had decreased by 0.2 percent points from December's rate of 6.8 percent.

Els said he expected an average inflation forecast of 5.4 percent, down from the 6.3 percent in 2016.

However, he expected a sharp decline in inflation in June to below 5 percent, buoyed by the low electricity prices increase, strong rand and an expected fall in food inflation.

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