Don ’ t hold your breath for a cut

It ’ s just as well that most economists weren ’ t expecting an interest rate cut from the SA Reserve Bank on Thursday. So there ’ s no need to be overly exercised about whether events in Saudi Arabia at the weekend will unduly influence its decision. The possibility of more market volatility globally, with unclear consequences for the rand and SA markets more broadly, might have killed off any small possibility of a surprise cut.

Since the last meeting of the monetary policy committee (MPC) in July, when it reduced the repo rate by 25 basis points to 6.5%, Bank governor Lesetja Kganyago and his deputies have not given any sort of forward guidance that would make one think a cut is on the cards this week. Whether it would be justified or not is a different question.

Of 18 economists surveyed by Bloomberg as of Tuesday, only four were expecting easier policy, with the rest seeing the repo rate staying on 6.5%. Similarly, money markets are showing small odds that rates would be cut.

At the July meeting, the Bank said its quarterly projection model forecast another 25 basis point cut by the end of the fourth quarter, though few thought this would come in September.

With only one more meeting before the end of 2019 and data for much of the year (except for the stronger than expected rebound in second-quarter GDP) pointing to subdued demand in the economy, an argument could have been made for the Bank to be braver and act with more urgency.

In assessing the outlook for inflation, the rand and the oil price have often featured prominently in MPC members ’ thinking, and the Saudi attacks, which took out about 5% of global oil supply, can only make them more cautious. A 20% jump in the price in one day is bad enough for anyone, but for a country that depends on Saudi Arabia for 40% of its oil imports, it is particularly serious. Add one of the most volatile currencies in emerging markets, and you have a lot to worry about.

Before we even get to the potential long-term implications, even in the short term, it is clear what is at stake. Based on Central Energy Fund data, the move in global prices means an expected cut in the price of 95 octane petrol in October has halved to 5c a litre. It ’ s not hard to imagine that if the situation continues much longer, that price relief could be wholly reversed.

The drone attacks, unprecedented in their nature, have threatened Saudi Arabia ’ s traditional role of filling supply gaps in times of turmoil, and it is not clear who will play that role now, if anybody. More worryingly, there is still no clarity on who was responsible for the blasts and the potential for an escalation into a full-blown military conflict.

After initially indicating he would give Iran the benefit of the doubt, by Tuesday US President Donald Trump was laying blame on the country. On the plus side, he seemed reluctant to draw the US into another conflict in the Middle East. With an election campaign in 2020 ahead, the last thing he needs is to have to tell weary US voters to be ready for another war.

In just another sign of the state of flux in the market, it took a single report from Reuters for oil prices to plunge about 7% on Tuesday afternoon in London. Saudi Arabia, it reported, was close to restoring about 70% of supplies and could return to full capacity in three to four weeks. On Monday, the Financial Times reported it could take months for production to return to normal.

Bank officials might have been encouraged by the rand ’ s resilience in the wake of the negative headlines. By late afternoon on Tuesday, the currency was down just 1% from its Friday close. But that tells us very little about the future reaction if there is an escalation in the Middle East.

The dire state of the SA economy and the subdued inflation rate, and easing elsewhere that has reduced risks for the rand, probably could justify a rates cut on Thursday. But a betting person would be well-served in wagering that caution will prevail.

THE SAUDI ATTACKS, WHICH TOOK OUT 5% OF GLOBAL SUPPLY, CAN ONLY MAKE IT MORE CAUTIOUS