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Economists call for rate cut to ease hardship

| Economic factors

Economists are calling for the South African Reserve Bank to consider easing interest rates, despite the risks, in the wake of gross domestic product (GDP) figures that show SA has moved into recession.

The 0.7% contraction in the first quarter of 2017 showed consumers were taking strain, with household spending falling 2.3%. Cutting interests rates could help to alleviate the pressure on consumers.

"Consumers are financially constrained, and an interest rate cut, even a 25 basis point easing, would be welcomed as many consumers are very vulnerable financially," Investec chief economist Annabel Bishop said on Wednesday.

"In a recessionary environment, an easier monetary policy stance is normally appropriate, although the problem the Bank has been facing is one partially of stagflation," she said.

Bishop did not expect an interest-rate cut this year and cautioned that a cut of 25 basis points would not significantly turn around confidence, as political and economic policy uncertainty remained a concern.

Senior FNB economic analyst Jason Muscat said rate cuts would boost consumer confidence but a cut was unlikely. FNB was looking to revise down its growth forecast for the year.

The lower risks to the inflation outlook — back in the target band of 3%-6% — mean the consensus is that rate cuts will boost consumer confidence.

The Reserve Bank forecast 1% growth for 2017 at its monetary policy committee meeting in May. But the bank might revise down its forecast along with other economists. Investec is looking to revise down its GDP growth forecast to closer to 0.5% year on year, from 0.8% previously, for 2017.

Old Mutual Investment Group slashed its annual growth forecast from just above 1% to 0.7% after the GDP figures were announced. The group’s senior economist Johann Els said negative growth was an indication that the Reserve Bank had fallen behind the curve when it came to interest-rate cuts.

"In addition to falling inflation, we have a stronger rand, an improving current account deficit, as well as a far reduced foreign financing need. Now the Bank is also faced with the reality of severe spending weakness," he said on Tuesday.

The Bank would be making a serious policy error if it did not make any cuts, Els said.

Momentum economist Sanisha Packrisamy said while rate cuts would benefit middle-and high-income earners, the prospects were being hampered by noisy politics.

 

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