Will interest rates remain unchanged?

Ahead of another Monetary Policy Committee (MPC) meeting on Thursday, analysts are predicting that interest rates are to stay unchanged.

“We expect rates to be unchanged at this week’s South African Reserve Bank (SARB) MPC meeting. However, the market often seems to be looking at a different MPC to the one we are focused on – a short-termist one that looks for any excuse to cut rates. We think the MPC will take this opportunity to re-stress what its reaction function is. The vote will be particularly closely watched. We expect rates to be unchanged through the end of the forecast horizon now, bar any negative shock to the long end of the inflation forecast,” added Nomura analyst, Peter Attard Montalto.

In the previous policy meeting, the MPC hinted that South Africa was at theend 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,” explained 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, said 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 further compared 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.”

It is difficult to predict at this stage whether an interest rate cut is on the cards, as was suggested towards the end of last year.

In terms of a longer term outlook for interest rates, Ngwenya added that 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,” concluded Old Mututal.