The Reserve Bank's monetary policy committee's (MPC) decision to keep the repo rate unchanged in July is "risky" and could lead to a recession, warned Chris Holdsworth, chief investment strategist at Investec Wealth & Investment.
Holdsworth, who oversees investment strategy, noted that monetary policy might soon become the most restrictive it has been in nearly twenty years.
"It was a risky move given the improved inflation trajectory. The MPC now expects inflation to be below the mid-point of the range for 3 consecutive quarters from Q4 this year. Our forecasts are slightly lower than the MPC’s – we expect inflation to be below 4% by October," he said.
The market expects three to four cuts of 25bps each over the coming 12 months, Investec noted.
"Even so, if the Reserve Bank’s inflation trajectory is correct that will still lead to the most restrictive monetary policy in 19 years by year end - with inflation expected to be below the 4.5% target," said Holdsworth.
He continued that it poses two risks: First, the MPC could put South Africa into recession, even with inflation in line with or lower than the middle of the band; second, there could be damage to the central bank’s credibility given unnecessarily tight monetary policy.
"It is not clear what threat to inflation the MPC sees to justify taking these risks. Nonetheless deferring a rate cut may simply mean a greater need for accelerated cuts later."
Holdsworth said that among the risks the MPC mentioned was its concern that inflation risks are skewed to the upside and risk of cutting ahead of the US.
"We expect further improvements to state-owned enterprises emanating from the structural reform programme will provide support for the rand."
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