A cut’s on the cards, but …
With Kganyago back for new term, Bank retains its hawkish tilt
● An interest rate cut is expected this week, but in the long term the Reserve Bank’s hawkish stance is likely to continue after the reappointment of Lesetja Kganyago as governor for another five years.
President Cyril Ramaphosa also promoted Kganyago’s adviser Nomfundo Tshazibana, as well as Rashad Cassim, who has been head of research at the central bank, to the posts of deputy governors.
Tshazibana and Cassim replace Daniel Mminele and Francois Groepe, who resigned earlier this year.
Six people sit on the monetary policy committee (MPC): the governor, his three deputies (Kuben Naidoo being the third) and two other members — appointed by the governor.
Peter Worthington, an economist at Absa, said: “This means that there could still be personnel changes in the committee that could marginally tilt the policy bias of the committee in future.
“If governor Kganyago wanted to tip the balance of hawkish versus dovish sentiment in the MPC in either direction, he could presumably select individuals that he believed would tilt one way or the other.”
Razia Khan, MD and chief economist for Africa and the Middle East at Standard Chartered Bank, said new appointments from within the ranks of the committee are “good for policy continuity — and the commitment to inflation targeting.
“We also think that external conditions are changing — and the SARB, precisely because the MPC will continue to be made up of many long-time members, will be better able to react to those changes in conditions by easing when easing is justified”.
Khan said that though markets regard Kganyago as a hawk, they view Cassim as an occasional dove and are undecided on Tshazibana.
She said Kganyago is the most highly regarded central bank governor in the Europe, Middle East and Africa region for his commitment to inflation targeting and central bank independence, though this has pitted him against those who have advocated the nationalisation of the Reserve Bank.
“SA’s inflation-targeting regime is likely the most important pillar of its post-apartheid pro-poor policy. Given the historic levels of inequality in the country, this news serves to reinforce an important part of the institutional strength that still supports SA’s creditworthiness,” Khan said.
Among the factors that could sway the MPC to cut interest rates by 25 basis points are low inflation, weak growth and a stable currency, while internationally the US has signalled firmer intentions to lower interest rates in the world’s largest economy, which is experiencing the longest expansion on
record. The continuation of looser global monetary policy has paved the way for a potential interest rate cut in SA this week.
Elize Kruger, a senior economist at NKC African Economics, said the US Federal Reserve was expected to proceed with at least three rate cuts — two this year and one more in the first quarter of 2020.
“The Fed will likely present these cuts as recession ‘immunisation shots’ and will adjust the dosage as a function of economic activity, inflation and trade developments.” Strong employment growth in June and renewed China-US trade talks favoured fewer cuts, and slower global growth and subdued inflation continued to favour a first cut at the Fed’s July meeting, she said.
This is likely to ease the pressure and provide room for other global central bankers to keep rates lower for longer.
In SA, inflation accelerated slightly to 4.5% in May from 4.4% in April, but it remains within the Reserve Bank’s 3%-6% target range.
The Reserve Bank at its May meeting revised its average headline inflation for the year to 4.5% from 4.8% previously.
Worthington said: “Subdued inflation, a relatively stable exchange rate and continued weakness in growth are likely to support a rate cut.”
Standard Chartered Bank is calling for a 50-basis-point cut in 2019 and tightening should new risks arise in 2020.
Ramaphosa’s appointments seen as good for policy continuity in MPC