Capricorn economist sees local rate cut in August following the South African Reserve Bank’s cue
At least one financial institution expects the central bank to use monetary policy to ease the economic burden of private households, saying that a rate cut in South Africa is likely to lead to a similar move in Namibia.
Chief Economist at Capricorn Asset Management, Floris Bergh, said it is Capricorn’s houseview that the South African Reserve Bank will cut rates this month and that it will be followed by a rate cut in Namibia in August by the Bank of Namibia after its Monetary Policy Committee meeting.
Slower growth in inflation has created space for monetary policy to reduce interest rates but this will have a negative impact on yields in the money market.
“It seems that monetary policy will be expected to provide relief and stimulus to economies in an environment where fiscal policy can do very little. Ideally, one would like to see governments loosen the purse strings, borrow more, cut taxes or spend more,” he said but added that such a strategy in Namibia will further worsen fiscal ratios.
“In our view inflation is likely to remain in the 4% to 5% range in both Namibia and SA for the foreseeable future, which is until 2021. It could even fall below these levels at times. The one factor to watch, though, is maize prices. It has recently risen sharply in the US and in SA. If sustained, this could put upward pressure in the food price chain. Food, oil and the exchange rate remains, as ever, volatility drivers of inflation,” he said.
Dwelling on wide ranging economic issues, Bergh said the weakness in the economy is becoming more widespread, witnessed by the severe decrease in new vehicle sales, slow credit growth and a sharp slowdown in the property market. Mining has also posted a contraction in the first quarter after two years of strong growth.
Looking at the remainder of 2019 and considering the 2% year on year contraction in the first quarter, he sees little room for any growth this year unless larger policy issues are resolved.
“Our hope remains that globally, regionally and domestically, increased cohesion of policy making will be achieved, in that monetary policy alone is not expected to make all the difference, but that a comprehensive battle plan can be established that will benefit all,” he continued.
“Lower interest rates will revive the “hunt for yield” theme, which should benefit high yielding bond markets like our own. Investors are likely to look to Emerging Market bonds to provide yield in a world of low and falling bond yields,” said Bergh.