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Up, down or stay: All eyes turn to SARB on rates

Sep 20 2018 08:06
Carin Smith

The SA Reserve Bank takes centre stage on Thursday afternoon with the announcement of the benchmark interest rate decision.

The decision whether the repo rate will increase, be kept unchanged at 6.5% or go down will be announced just after 15:00 in Pretoria. 

On Wednesday Stats SA announced that consumer inflation was 4.9% for August, lower that what most analysts had been expecting. And that, according to analysts, may have reduced pressure on the central bank to boost rates. 

"The rand reacted positively to the inflation data release, and this was driven by funds that flowed into the South African bond market. The yield on the benchmark R186 fell to 9.13% from 9.21% after the release, which suggests that investors are starting to see value in South Africa," said TreasuryOne's Wichard Cilliers in a morning note.

Investec chief economist Annabel Bishop, in a note to clintes, said the weaker than expected CPI outcome for August would alleviate the expected upward trajectory in inflation for the rest of this year and into next year. This, she said, would reduce the pressure somewhat on the SARB to hike interest rates, even though globally interest rates remain in an upward cycle, particularly in emerging markets.

Under pressure 

Jameel Ahmad, global head of currency strategy and market research at FXTM, said that if inflationary pressures had come in higher in August than in July, it would have put the SARB under tremendous pressure to consider raising interest rates. 

"As it stands, the lower inflationary pressures allow the SARB to consider leaving monetary policy unchanged for now. But overall the SARB does remain in a very unenvious position," he said.

He said external uncertainties have left the rand victim to a significant period of market weakness that is pressuring the SARB to follow the tightening steps taken by the central banks of Russia and Turkey to offset the threat of inflation and further currency weakness for their respective market.

"However, the news that SA has unfortunately fallen into a recession, on the other hand, opens up the discussion that interest rates can be lowered to support domestic economic growth.”

Michael Ade, chief economist of Seifsa, a national federation representing 23 independent employer associations in the metals and engineering industries, said South Africa desperately needs a countervailing economic stimulus to return the economy to health.

He said the latest inflation data provide a firm rationale for SARB to leave the repo rates unchanged or even cut the repo rate by at least 25 basis points to encourage spending, boost domestic demand and lessen increasing pressure faced by both businesses and individual consumers.

He, however, also warned that galloping petrol prices, volatile exchange rate and generally increasing electricity prices – including the potentially negative effects of a global trade war – may discourage the MPC from taking an expansionary monetary policy stance since that may ultimately be inflationary.

Jason Muscat, senior economic analyst at FNB, also cautioned about the potential impact of the fuel price. He commented that, while the bank expects inflation to remain within the target band through to the end of 2019, there is still a large fuel price increase looming.

Luigi Marinus, portfolio manager at PPS Investments, said the effect of the new inflation information will be an important consideration for the SARB, as markets are pricing in the expectation of at least a 25bp increase to short-term rates.

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