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Deflation a bigger worry than inflation as another rate cut is expected soon

20 May 2020 6:33 PM
Tags:
Interest rates
Repo rate
Reserve bank
Lockdown
COVID-19

The Reserve Bank is expected to cut the repo rate by another 100 points soon.

The South African Reserve Bank’s Monetary Policy Committee (MPC) meets this week, with another rate cut expected to be announced on Thursday.

However, it is uncertain whether the cut will be as drastic as the last two 100 basis point cuts announced in March and April,

My hope is a 100 basis points. Given the fact that the economy is in such a deep depression at the moment and that inflation is going to fall more... But I suspect maybe they'll go for something slightly less.

Johan Els, economist - Old Mutual Investment Group

The headline is that I'm far more worried about deflation in the SA economy than inflation. We'll get the April number next week that will probably be three per cent. And then we are down to two per cent in May and June. And that's lower than the Reserve Bank expected at their previous meeting. So that means that in an economy like SA and all the other issues around quality improvement etc. - it may be very difficult to say we have any sense of inflation at all when we measure two per cent. If I were the central bank I'd be far more worried about deflation than inflation.

Johan Els, economist - Old Mutual Investment Group

When we get to negative price increases - let's just recap - we've had some of that in some categories before. Remember in the late 90s when Trevor Manuel as part of policy reform in SA cut import tariffs on a whole bunch of electronic goods - prices actually fell. But when actual total inflation goes there, you and me,we just wait for prices to fall further before we make the next purchase. That is the danger - it puts off production, it puts off employment. When we don't buy because prices keep on falling that's deflation and that's a negative impact on economic growth.

Johan Els, economist - Old Mutual Investment Group

Listen to the full interview below.

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20 May 2020 6:33 PM
Tags:
Interest rates
Repo rate
Reserve bank
Lockdown
COVID-19

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