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Cape Town - While SA Reserve Bank (SARB) governor Lesetja Kganyago reiterated that gross domestic product (GDP) growth has remained weak, this was not enough to tempt the MPC members to collectively decide on a rate cut, according to Luigi Marinus, senior investment analyst at PPS Investments.
"Our view remains that the SARB may continue to find it difficult to reduce interest rates considering the global perspective. There is an increased likelihood that developed economies may hike rates, which could be detrimental to emerging market cash flows,” commented Marinus.
A further ratings downgrade could place upward pressure on interest rates in coming months, cautioned FNB CEO Jacques Celliers.
Following the SA Reserve Bank’s decision earlier on Thursday to leave the repo rate unchanged at 6.75%, FNB confirmed that it will maintain its prime lending rate at 10.25% and will review its position after the next SARB monetary policy committee (MPC) meeting in January 2018.
“While no change was a widely anticipated outcome of this meeting of the MPC, factors that drive price instability have been gathering momentum of late," said Celliers.
Persistent upside risks
Mamello Matikinca, FNB chief economist, added that SARB’s decision to keep rates on hold comes as little surprise given the persistent upside risks to the inflation outlook.
"While we expect inflation to continue to moderate, we expect inflation to ease towards the mid-point of the SARB’s target band by early next year. Significant rand weakness could negate this downward trend," explained Matikinca.
Moody’s and S&P are expected to deliver their credit assessments on Friday, following what Matikinca describes as a disappointing mini budget, which pointed to ongoing fiscal slippage and rising debt.
"In the absence of a credible plan to rein in government indebtedness, it’s difficult to see how SA can avoid a downgrade,” said Matikinca.
Other potential upside risks to the inflation outlook include the tightening in global liquidity conditions; the threat of increased political turmoil and policy uncertainty regarding the ANC’s elective conference; the potential for significant electricity price increases and a persistent increase in the oil price.
These factors lead FNB to believe that it will be unlikely to see further interest rate cuts.
Key event risks
Novare’s economic strategist, Tumisho Grater, said that ahead of key event risks, which include the anticipated credit rating reviews and the ANC elective conference, the rand remained below the R14.00 to the dollar mark.
It was also unaffected by the SARB’s decision to leave the repo rate unchanged.
"While the central bank acknowledges that the risk to the inflation outlook has increased, the SARB projects that inflation is expected to remain within the target range for the rest of the forecasted period," commented Grater.
"Improved world growth has contributed to an increase in international oil prices, which could, in turn, provide a boost to global inflation. Higher inflation has implications for global central banks as this may increase the pace of monetary policy tightening by global central banks such as the US Fed."
In her view, this could reverse capital flows to emerging markets such as SA.
"Increased capital outflows are negative for the rand, which could translate into inflationary pressures, keeping the SARB hawkish," she said.
Additional challenges
In the view of Momentum Investments, the current environment has created additional challenges for monetary policy.
"The SARB admitted the imminent rating agency reviews could weigh negatively on the currency should downgrades materialise, but qualified its comments by noting that the degree to which the currency has priced in an additional downgrade is still highly uncertain," said Momentum economist Sanisha Packirisamy.
As such Momentum Investments believes the chances of further interest rate easing have been reduced in the near term.
However, a possible positive outcome at the ANC's electoral conference in December and expenditure cuts in the national budget in February prevent the firm form ruling out the possibility of marginally lower interest rates in the medium term, should the currency remain well behaved and inflation forecasts stay well within the target band.
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