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Analysts weigh in on SARB's next interest rate move

Cape Town – Interest rates are expected to stay unchanged when the South African Reserve Bank (SARB) announces its monetary policy decision on Thursday, according to analysts.

“The uncertainty around the rand with Moody’s sovereign credit rating review still pending would make the monetary policy committee (MPC) very cautious to change any policy settings,” said Tinyiko Ngwenya, an economist for Old Mutual Investment Group.

“At the previous policy meeting, the SARB alluded to the fact that they were at the end of the hiking cycle and that the major risk to them was the rand. However, if they were to ease rates before the Moody’s rating review, in the event that the review then comes back with a two notch downgrade to sub-investment grade, the rand would be negatively affected, which would ultimately change the trajectory.”

Ngwenya said while economists were predicting an interest rate cut for the second half of this year, it looks more likely that this cut will only occur in 2018, unless inflation continues to surprise on the downside and the rand remains stable.

Political uncertainty further complicates this outlook and supports the view that rates will remain unchanged for the time being, said Ngwenya.

Peter Attard Montalto, emerging markets economist at Nomura, also expects rates to be unchanged at this week’s SARB MPC meeting.

"We expect rates to be unchanged through the end of the forecast horizon now, bar any negative shock to the long end of the inflation forecast...We think short-run CPI inflation forecasts may fall very slightly, but expect no change through end-2018 and 2019; equally we do not think growth forecasts will change particularly significantly," said Montalto.

"The MPC needs to make the case that an end to hikes does not mean cuts."

READ: Steady interest rate good for property sector - experts

'Choppy' rand

Jeffrey Schultz, an economist at BNP Paribas, agreed that the SARB is likely to continue being cautious – especially in the light of the rand’s “choppiness”.

The rand’s performance has in the past week been volatile, by and large due to domestic political uncertainty and shaky politics in the US and Brazil.

“It is worth noting that the currency continues to hold up well against its peers on an inflation-adjusted trade-weighted basis,” said Schultz.

The MPC is likely to be wary of the adverse impact of a sovereign credit ratings downgrade on domestic investment and will probably adjust expected gross domestic product (GDP) growth downwards from the forecast of 1.2% for 2017 and 1.7% for 2018.

Schultz pointed out that SARB governor Lesetja Kganyago recently said calls for interest rate cuts were “premature” and that lower rates may only be considered in September this year.

In Schultz's view, the MPC is likely to revise down its 2017 inflation forecasts a little, owing to recent downside surprises in core CPI and expected further food-price moderation, despite a volatile rand.

READ: Kganyago: Inflation holds key to interest rate cut

"Policymakers should sound cautiously optimistic on the inflation outlook, but still elevated inflation break-evens and a choppy rand are likely to keep rate cuts off the table just now," said Schultz.

"While we believe the prevailing circumstances are likely to warrant more caution this time around from the more dovish MPC members, we do not think that much has really changed from an inflation standpoint... Accordingly, we maintain our long-standing below-consensus call for headline inflation to slow to 5.4% in 2017 and 5.1% in 2018."
 
By September, BNP forecasts CPI inflation to be closer to 5.0% and on track to slow to around the mid-point of the SARB’s 3% to 6% target range by year-end.

"As such, the picture in terms of the country’s real rates will look extremely compelling and should provide some scope for the MPC to help ease a bit of pressure on the still ailing consumption side of the economy," said Schultz.

"We maintain our counter-consensus call for the SARB to ease policy rates modestly from Q4 this year, with a 25 basis-point cut in the policy rate in both November this year and January 2018."

Bond market

Zain Wilson, analyst for the Old Mutual Balanced Fund, said the bond market isn’t expecting a rate cut to come from this meeting, but rather appears to be pricing in marginal cuts for next year.

“In the event that the Reserve Bank did cut the repo rate, the bond market should rally – given that they’re not expecting much – whereas banks, retailers and property would all benefit from the cut. On the other hand, in the unlikely event of a hike, the bond market appears quite sensitive and would be expected to sell off,” said Wilson.

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