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Cape Town - Thanks to Moody's stable outlook for SA, the Monetary Policy Committee (MPC) of the SA Reserve Bank (SARB) will likely reduce the repo rate by 25 basis points on Wednesday.
This is the conclusion of Nedbank's Corporate and Investment Banking (CIB) division after it analysed its latest Interest Rate Barometer.
A 25 basis points cut would lower the repo rate, the rate at which banks borrow money from the SARB, to 6.5% and the prime lending rate to consumers to 10%.
According to Nedbank, on a weighted basis, the barometer implies a split probability of a 47% chance of a hold and a 47% chance of a cut at this week’s MPC meeting. It believes that it will be a very close call between these two options for the MPC.
"Based on our analysis, we are of the opinion that the repo rate will be reduced by 25 basis points this week. However, before Friday’s rating action we thought a cut was more likely in May rather than at this week’s MPC meeting," said Nedbank.
"[But] the 'stable' outlook assigned to SA’s rating by Moody’s now favours a first rate cut this week in our opinion. We maintain our base case that two cuts of 25 bps each are likely to materialise this year."
Given the elimination of significant upside risks that SARB had previously been concerned about - particularly the rand - Nedbank sees the risks to the inflation outlook as balanced over the medium-term.
John Loos, household and property sector strategist at FNB, indicated that FirstRand also expects a 25 basis points interest rate cut in the repo rate on Wednesday.
He said from an “inflationary pressures” point of view, such a cut would appear completely justified in the light of the latest Consumer Price Index (CPI) inflation rate for February being at 4% - therefore in the lower half of SARB’s 3% to 6% target range.
In addition, in the early stages of the year the rand has performed relatively strongly, curbing imported price inflationary pressures, he pointed out.
Loos, however, expects a rate cut - if there is one - to be a “once-off” in 2018.
Market focus
Rand Merchant Bank (RMB) Global Markets Research pointed out that globally, the focus this week will be on trade tariff developments, while local markets will be eyeing the MPC interest rate decision on Wednesday. RMB expects a 25 basis points cut on the back of an improved political environment, positive Budget 2018 and an affirmed credit rating.
"With inflation printing lower, the Fed still only hiking two more times this year and a stable outlook from the rating agencies, recent events have paved the way for a cut quite nicely," said Gordon Kerr, a fixed-income analyst at RMB.
Investec chief economist Annabel Bishop commented that Investec sees the possibility of a 25 basis points cut as 50/50 currently, with the market showing an expectation of closer to 40%.
"Indeed, the MPC inflation forecast in 2019 should fall from 5.4% y/y to around 5.1% y/y, as the SARB strengthens its rand forecast materially, but at the same time it will need to increase its oil price forecast and also the impact from Budget 2018 on CPI inflation," she said.
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