20180328-法国巴黎银行-South_Africa__Rate_cut_not_clear-cut__9页_418kb

South Africa: Rate Cut Not Clear-Cut Summary

Core Content

The South African Reserve Bank (SARB) cut the policy rate by 25 basis points (bps) to 6.50% on 28 March 2018, in line with market expectations. This decision was made by a seven-member Monetary Policy Committee (MPC), which voted 4-3 in favor of the cut. Despite the rate reduction, the SARB maintained a cautious tone, indicating that further monetary easing will depend on additional evidence of inflation expectations falling below 5.0%.

Main Views and Key Information

1. Inflation Projections and Expectations

• The SARB kept its 2018 CPI inflation forecast at 4.9%, aligning with BNP Paribas' own projections.
• It revised its 2019 CPI forecast downward to 5.2% and 2020 to 5.1%, reflecting a more optimistic outlook due to a stronger ZAR.
• Core CPI inflation was unchanged at 4.6% for 2018 but reduced to 4.9% for 2019 and 2020.
• Q1 2018 inflation expectations dropped to 5.2% for 2018 and 5.3% for 2019, the lowest since before the global financial crisis.
• The MPC believes inflation expectations are still too high and prefers them to be anchored closer to the 4.5% midpoint of its target band.

2. Rate Cut Timing and Conditions

• The next rate cut is expected to occur in July 2018, not May, as the SARB wants to see more stability in inflation expectations and the currency before proceeding.
• The MPC is cautious and emphasizes that it does not respond mechanistically to changes in the inflation path.
• The decision to cut rates was influenced by the removal of political and credit risk premia, and the improved outlook for the ZAR.

3. Economic Outlook and Growth Projections

• The SARB only modestly adjusted its GDP growth forecasts, projecting an average of 1.7% for 2018 (up from 1.4%), with a slowdown to 1.5% in 2019 and a pick-up to 2.0% in 2020.
• The MPC believes the country's negative output gap will close sustainably only from 2020.
• Potential growth assumptions remain unchanged at 1.3% for 2018–19 and 1.4% for 2020.

4. Currency and External Factors

• The SARB views the ZAR as "somewhat overvalued" and notes that further strengthening is likely limited.
• A stronger currency helped to "soften" the impact of the expected 1% increase in VAT from 1 April 2018.
• Lower external vulnerabilities and a tighter fiscal trajectory have contributed to the MPC's more accommodative stance.

Charts and Visuals

• Chart 1: Highlights how a stronger ZAR assumption helps reduce the SARB's medium-term CPI forecasts.
• Chart 2: Suggests that inflation expectations would need to fall further for the SARB to feel comfortable with another rate cut.

MPC Divisions

• There are clear divisions within the MPC: some members want to bring inflation expectations down closer to the 4.5% midpoint, while others believe the SARB has room to provide more stimulus.
• The MPC's model now assumes one rate hike between now and end-2019, down from two, but still expects two hikes in 2020 to reach a steady state of 4.5% inflation.

Conclusion

The SARB's decision to cut rates reflects a shift in risk perception, with reduced political and credit risk premia allowing for more monetary stimulus. However, the bank remains cautious and will likely wait for further evidence of inflation moderation before cutting rates again, with the next possible cut scheduled for July 2018. The economic outlook remains subdued, with growth expected to slow in 2019 and pick up only in 2020.