South Africa: Reserve Bank Is Likely to Cut Rates, but How Low Can It Go?

analysis

The SA Reserve Bank is widely expected to cut rates this week, with most economists expecting a 25 basis point cut. With a stagnant economy, there should be a lot more room for monetary loosening, but there probably isn't, given the economy's structural challenges.

South Africa's main CPI inflation rate in May was a relatively moderate 4.5%, but a glance at other data would suggest it should be far slower. The official unemployment rate is north of 27% and most analysts reckon it is, in reality, closer to 40%, so in theory at least there should be little in the way of upward wage pressures in the economy. Demand is subdued, to say the least, with retail sales rising a modest 2.4% in April year-on-year. And the economy contracted an eye-popping 3.2% in the first quarter, with little overall growth seen this year.

In such an environment, one would expect inflation to be much lower. But South Africa is not a classic textbook case for Economics 101, with deep structural issues, such as labour market rigidity and wage hikes that appear to blithely ignore the realities of unemployment. Along with the volatility of the rand and factors such as global...

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