March rate cut hinges on budget, persistent rand strength

Cape Town – Analysts were not surprised at the decision of the Reserve Bank's monetary policy committee (MPC) to keep interest rates at 6.75%.

Following the news from the first monetary policy committee (MPC) meeting of the year, the rand strengthened to R12.20/$, noted Bianca Botes of corporate treasury management at Peregrine Treasury Solutions.

EasyEquities noted that the rand strengthened to reach an intra-day high of R12.15/$ after the announcement.

Reserve Bank governor Lesetja Kganyago on Thursday said that out of the six members of the MPC, five preferred the unchanged stance, while only one favoured a 25 basis-point cut.

Risks to the inflation outlook include the rising oil price, the national budget to be announced in February and possibly a sovereign credit ratings downgrade by Moody’s in March, Kganyago said.

“The impact on the rand and on long-bond yields could be significant, but the extent to which a universal downgrade is already priced in remains unclear,” he said of the downgrade.

FNB chief economist Mamello Matikinca also acknowledged that the downgrade would lead to capital outflows and a weakening currency. “We believe the SARB (South African Reserve Bank) will wait until event risk subsides before pronouncing on any rate moves. Should event risk dissipate, we see scope for a rate cut this year.”

Stanlib chief economist Kevin Lings is of the view that there could be modest rate cuts of 25 basis points each into the middle of 2018, provided that the National Budget has a “confidence boosting” effect that would help South Africa avoid further rating downgrades. Thereafter, interest rates are likely to remain on hold until 2019, he explained.

Investec economist Kamilla Kaplan believes that if the rand continues to strengthen this year, and if the new levels are maintained, it would provide scope for the SARB to consider a rate cut on expected lower inflation. “In the meantime, the room to cut is constrained by inflation being forecast closer to 5.5% over the SARB’s six- to 24-month forecast horizon,” she said.

TreasuryOne’s currency expert Andre Botha went so far as to say that a rate cut at the next MPC meeting in March is likely if a stronger rand persists. “However, we still have a budget speech and a possible rating downgrade to get through before that cut will be set in stone.”

Momentum Investments economist Sanisha Packirisamy reiterated her views that there is room for rate cuts of 50 basis points, two of 25 basis points each.

The Nedbank Group Economic Unit noted that the MPC was less hawkish at this meeting than at the previous one in November. Continuing uncertainty around the budget, a possibility of a downgrade to junk and “continuing uncertainty over how quickly and by how much the ANC’s change in leadership will translate into meaningful steps towards positive policy reform and against corruption” reduced the possibility of a rate cut.

Additionally, the SARB’s forecasting model suggests further tightening in 2018 and again in 2019. “But on unchanged assumptions we think that they will hold interest rates unchanged during this year. Clearly if there is good news over the next month or so and the rand continues to strengthen, the case for cuts will begin to grow.

“Alternatively, a botched State of the Nation Address combined with a disappointing budget and further sovereign downgrade could dent the current buoyant sentiment equally as quickly.”

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