No repo rate cut expected

THE strong rand and a contained inflation rate within the 3%-6% target band are unlikely to result in an interest-rate cut from the South African Reserve Bank’s monetary policy committee (MPC) tomorrow.

At the committee’s previous meeting in November interest rates remained at 6.75%, but Bank governor Lesetja Kganyago flagged a weaker rand, political uncertainty ahead of the ANC conference and prospects for further credit-ratings downgrades as concerns.

Since then, the rand has strengthened significantly, mainly due to the election of Cyril Ramaphosa as ANC president. If the ANC wins the 2019 general poll SA will have Ramaphosa as head of state, a respected businessman who is largely perceived as market friendly.

However, his victory is unlikely to spur interest-rate cuts as political risk still remains. “The rand is still vulnerable to fiscal and sovereign credit ratings outcomes during the first quarter of 2018,” said Investec economist Kamilla Kaplan.

The MPC’s new quarterly projection model, with its explicit 4.5% inflation target, could encourage the Bank to be more hawkish.

Kganyago said the Bank did not have an unconditional commitment to change policy rates in line with the model, but the model suggested three interest-rate rises of 25 basis points each by the end of 2019.

In the interim, the Bank was expected to hold off on changes to the repo rate until the 2018 budget in February. Inflation was expected to remain below the Reserve Bank’s 6% upper target range. —