Two more rate cuts could be on cards before April - economist

Cape Town - Momentum Investments expects the monetary policy committee (MPC) of the South African Reserve Bank (SARB) to announce two interest rate cuts of 25 basis points each before the end of the first quarter in 2018.

Head of investment research and asset allocation Herman van Papendorp and economist Sanisha Packirisamy of Momentum Investments base their projection on the steadily recovering global macro-economic climate, an improvement in the inflation trajectory, a meaningful shift lower in inflation expectations and SA's still-muted domestic confidence.

In the view of Van Papendorp and Packirisamy, this justifies further monetary policy easing in the current interest rate cycle.

"With the SARB choosing to stay put at its September 2017 meeting, the timing of further expected monetary policy easing will depend on the outcome of a number of high risk events, including potential material fiscal slippage announced in the October 2017 (mini budget), the ratings agencies’ November 2017 reviews and the political outcome of the ANC elective conference in December 2017," Packirisamy said in a September market snapshot on Monday.

Earlier this month SARB governor Lesetja Kganyago announced the MPC had decided to keep the repo rate unchanged at 6.75%, contrary to the expectations of many economists. 

“The MPC has decided to keep the repurchase rate unchanged at 6.75% per annum. Three members preferred an unchanged stance and three members preferred a 25 basis point reduction. Ultimately the committee decided to keep the rate unchanged,” he said at the time. 

Politics and poor fiscal health

Dave Mohr (chief investment strategist) and Izak Odendaal (investment strategist) at Old Mutual Multi-Managers said the risk of further downgrades amid political uncertainty and an unhealthy fiscal picture also appears to weigh heavily on the cautious MPC.

"Simply put, the MPC seems to fear another rand blow-out that will lead to galloping inflation. This ignores the fact that the exchange rate has a much smaller influence on inflation than in the past," they said on Monday.

"It also ignores the fact that the rand is more or less fairly valued against the dollar now, while it was overvalued when its five-year collapse started in 2011. Similarly, the dollar remains historically expensive, so its upside is surely limited."

Mohr and Odendaal are of the opinion that further rate cuts are unlikely to spur a consumption boom.

"Consumer confidence is still low and households probably wouldn’t use lower rates to borrow much more. But it will relieve some pressure on households and increase optimism levels, especially since the tax burden is likely to rise over the next year."

JSE stumbled in September

Packirisamy said September was a difficult trading month for the SA equity market.

"After choppy trade in the first half of the month, the JSE stumbled following a hawkish US Fed interest-rate setting meeting. Losses extended into month-end as geopolitical tensions spiked," she said.

The FTSE/JSE All-share index closed 0.9% lower in September 2017, driven weaker by losses in resource shares, while a weaker rand and the SARB’s decision to keep interest rates on hold weighed negatively on financial and retail stocks.

SA's ten-year government bond yields, meanwhile, rallied 17 points in the first week of the month, but edged higher towards month-end.

The inflation-linked Bond index ticked up 0.9% in September 2017, while the FTSE/JSE-listed Property index outperformed in relation to the fixed income market by 1.2%. SA cash increased by 0.6% in the same period.

Rand loses ground

The rand weakened 4% against the dollar in September, as renewed threats of a conflict between North Korea and the US triggered a flight-to-safety bid among investors, said Momentum Investments.

According to Van Papendorp and Packirisamy, the rand's recent underperformance leaves the currency weaker against its emerging market peers on a 12-month rolling basis.

The rand also traded 3.3% weaker against the euro during September. The euro lost ground relative to the dollar late in the month as investors expressed their concerns over possible difficulties in cobbling together a coalition government in Germany.

The rand weakened 6.9% against the British pound in September 2017 on more hawkish rhetoric from the Bank of England, which brought market expectations for interest rate hikes forward, despite mixed economic data in the UK.

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