Rates expected to remain on hold despite rand weakness
● Despite a period of pronounced emerging-market (EM) currency weakness that has seen the rand fall to its weakest levels in two years and raised inflationary fears, the Reserve Bank is expected to keep rates unchanged this week, bringing much relief to an under-pressure South African economy.
Turkey’s central bank sharply increased its benchmark lending rate this week to support its plunging lira, which has been at the centre of the EM crisis in recent weeks.
Most economists expect the Reserve Bank’s monetary policy committee (MPC) to consider SA’s poor growth forecast, which has now been revised to under 1% for 2018 after a surprise GDP contraction in the second quarter.
The Bank, led by governor Lesetja Kganyago, follows its inflation-targeting mandate over and above any economic growth considerations, but in recent times past the state of the economy has weighed on its decision. Even so, some economists expect some of the MPC members to vote for a 25-basis-point hike.
The bank has kept interest rates on hold since a 25-basis-point cut in March amid a benign inflationary environment. It’s a situation that has significantly deteriorated since, with administered prices such as petrol shooting to all-time highs, which has constrained consumer spending and fed into anaemic growth.
Inflation accelerated to 5.1% year on year in July after touching a seven-year low of 3.8% year on year in March. The Bank has a targeted range of 3%-6%.
Izak Odendaal, investment strategist at Old Mutual Multi-Managers, said: “Balancing the internal and external factors probably calls for unchanged rates at the September meeting.”
If the global environment deteriorated further, the Bank might be forced to hike rates at its next meeting in November, its last one for the year.
If the Bank does hike, it is likely to be in response to further capital outflows and currency weakness, “which could reverse rather quickly if investor sentiment changes”, Odendaal said.
Therefore, and given the weakness in the economy, the hiking cycle was likely to be shallow and tentative.
While the rand has been at the centre of the EM crisis because of its liquidity, there was some good news with regard to the risks posed by a potential ratings downgrade by Moody’s.
The agency said it was unlikely to cut SA’s remaining investment grade rating to junk.
Lucie Villa, a vice-president and senior credit officer at Moody’s, forecast at a summit this week that the South African economy would experience “a broad-based recovery” and said the probability of a credit ratings downgrade was “very low”.
The rand gained some strength from the statement.
Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions, said the gains were sustainable in the short term — “but with the understanding that only around 20% of these gains have been driven by local factors such as the Moody’s commentary. Most of the rally has been driven by the greater EM landscape and, in particular, the slowdown in the sell-off of emergingmarket assets.”
She added: “Theoretically, the rand should be trading at slightly stronger levels. However, the weak risk profile of the broader EM group, coupled with poor local performance, means that the rand remains vulnerable and will continue to trade at a discount.”
The rand remains vulnerable and will continue to trade at a discount Bianca Botes
Peregrine Treasury Solutions