A cut’s on the cards, but …

With Kganyago back for new term, Bank re­tains its hawk­ish tilt

Sunday Times - - Business Times - By ASHA SPECKMAN speck­[email protected]­day­times.co.za

● 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

Cyril Ramaphosa

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