Hawkish cut, dovish hold
INFLATION LOWER: CONSUMERS, BUSINESS LEADERS ARE GETTING MESSAGE
Sarb faced a number of cross currents in deciding to hold interest rates last week.
Consumer inflation was a little higher than expected in August, but at 4.3% remains below the midpoint of the target range. Food inflation has bottomed and should continue rising from the current pace of 3.8%, but unlike previous cycles, isn’t expected to hit double digits.
Importantly, consumers, workers and business leaders are starting to get the message that inflation’s lower, according to the Bureau for Economic Research’s inflation expectations survey. The SA Reserve Bank’s (Sarb’s) Monetary Policy Committee (MPC) wants lower inflation expectations, as these tend to feed into lower realised inflation.
The economy performed better than expected in the second quarter, but there’s no indication this strong upward momentum will be sustained.
The underlying growth picture is still gloomy and Sarb expects 0.6% growth this year and only 1.5% next year (previous forecast: 1.8%).
The jump in the oil price, following attacks on Saudi Arabian oil facilities by Yemeni rebels, has reversed itself. The petrol price hike next month should therefore be fairly small.
However, there could be another attack. The US accusation that Iran is behind it means the decades-long standoff between the two could escalate.
The rand has weakened since the July MPC meeting, when it was trading at R13.90 to the dollar. But the rand remains within its broad trading range of the past four years.
Fiscal risks
Then there are fiscal risks. Government’s expected to make an announcement on how it expects to resolve the Eskom crisis. This is followed by the Medium-Term Budget Policy Statement at end October, which presents an update on government’s borrowing requirement. Moody’s is scheduled to announce a ratings decision on November 1. It has ruled out a downgrade, but a change in outlook from stable to negative is likely.
If any of these events turn out differently to what the market expects, the result could be a sell-off in the rand and local bonds. However, a better-than-expected result could see a rally in bonds.
The conservative Sarb kept the repo rate unchanged at 6.5% (prime overdraft rate of banks remains at 10%).
The November 21 meeting is a more likely candidate for a rate cut.
As local investors, we continue to see local short-term and long-term interest rates as attractive, given a muted outlook for local inflation and a declining global interest rate trend that’s very much still intact.
‘The economy performed better than expected in the second quarter.