“In the previous policy meeting, the South African Reserve Bank’s Monetary Policy Committee did allude to the fact that they were at the end of the hiking cycle and that the major risk to them was the rand. However, if they were to ease rates before the Moody’s rating review, in the event that the review then comes back with a two notch downgrade to sub-investment grade, the rand would be negatively affected, which would ultimately change the MPC’s trajectory,” says Tinyiko Ngwenya, an economist for Old Mutual Investment Group.
Political uncertainty further complicates this outlook and supports the view that rates will remain unchanged for the time being, says Ngwenya. “At this stage, inflation is coming down and growth is recovering from last year’s lacklustre growth, so we are seeing some progress in the economy. However, political uncertainty is expected to remain high – especially leading up to the ANC Elective Conference set to take place in December.”
Ngwenya compares the Reserve Bank’s current position to that of the US Federal Reserve in November last year, leading up to the elections. “The Fed was on course to hike interest rates, but considering the impact this would have on the dollar and the uncertainty surrounding the upcoming elections, they made the decision to wait until the November election had taken place before changing any monetary policy settings. South Africa is in a very similar situation at present, where the Reserve Bank will likely hold rates until closer to December when they have more political certainty and a better idea of the rand‘s course.”
Touching on the implications for the rest of the market, Zain Wilson, Analyst for the Old Mutual Balanced Fund, says that one implication for what the market is expecting is in the forward rate agreements (FRAs) which are currently pricing in marginal cuts quite far into the future. “The bond market isn’t expecting a rate cut to come from this meeting, but rather appears to be pricing in marginal cuts for next year.
“In the event that the Reserve Bank did cut the repo rate, the bond market should rally – given that they’re not expecting much – whereas banks, retailers and property would all benefit from the cut. On the other hand, in the unlikely event of a hike, the bond market appears quite sensitive and would be expected to sell off,” adds Wilson.
In terms of a longer term outlook for interest rates, Ngwenya says while economists were predicting an interest rate cut for the second half of this year, it is looking more likely that this cut will only occur in 2018 unless inflation continues to surprise on the downside and the rand remains stable. “Key factors that could change such an outlook would be if the rand were to change course and weaken considerably. This could happen if, for example, Moody’s decides to downgrade South Africa to sub-investment grade, which would remove the cut that we currently have in our forecast.”
