Sarb likely to hold rates

POSITIVE SIGN: CUTS ARE WIDELY EXPECTED IN COMING MONTHS

Caution amid uncertainty about fiscal numbers and credit rating action. Moneyweb

Economists widely expect the South African Reserve Bank’s (Sarb) monetary policy committee (MPC) to keep interest rates on hold today, despite an improved inflation outlook.

The local currency has strengthened significantly since the MPC’s last meeting in November after Cyril Ramaphosa was elected ANC president. A Nersa decision to grant Eskom a mere 5.2% tariff increase, as opposed to the 19.9% it asked for, should also support an improved inflation outlook.

But economists warn that uncertainty regarding SA’s fiscal numbers and the risk that Moody’s may downgrade the country’s local currency rating to junk, will likely move the MPC to keep rates unchanged.

PwC economist Christie Viljoen says the MPC cannot afford to cut rates at present due to the risks associated with the 201819 fiscal budget. “If the budget presentation [in February] shows a weakening in fiscal discipline, SA could see its local bond rating being downgraded by Moody’s Investors Service during March.

“This could result in a substantial outflow of money from the local bond market. An accompanied weakening in the rand would pressure inflation closer towards the upper end of the target band.”

Stanlib’s Kevin Lings expects the Sarb to keep rates on hold, but to highlight the improvement in the currency and the lower than expected electricity price increase. He says most people are lowering their inflation forecasts for 2018 and the market is pricing in some reduction in interest rates in the coming months. He expects two cuts of 25 basis points each after the budget and for rates to be kept on hold thereafter.

Apart from the uncertainty regarding possible credit rating action, the impact of further hikes in US interest rates on capital flows to emerging markets also argues against the Sarb cutting rates aggressively.

Citi’s Gina Schoeman also expects rates to be kept on hold, but says it will likely be a close call accompanied by a dovish statement compared to that of November.

Two major inflation risks – the ANC election and electricity tariffs – are out of the way and the outcome has been favourable for the inflation outlook. “However, inflation risks in the form of the February budget, Moody’s decision and debate on President Jacob Zuma remain. What’s more, the oil price has risen, which will offset some of the benefit to the inflation outlook from a stronger currency. If all ends up favourable by March, then the Sarb can certainly deliver a rate cut then, and perhaps even in May.”

Ramaphosa factor

While Ramaphosa’s election was widely perceived as positive for markets and the economy, Viljoen says it hasn’t really changed the outlook for interest rates in the short term.

Schoeman says the rand’s response to Ramaphosa’s election opens the door for another cut in the short term. This explains why forward-rate agreements are pricing in a 30% probability of a cut, which is fair in her opinion. “We do, however, think Ramaphosa needs to start delivering something for this to sustain.”