NOVEMBER 2014 RATES WATCH – Kganyago’s opening gambit?

It’s time for the South African Reserve Bank, now under the leadership of former Deputy Governor Lesetja Kganyago (bye-bye Gill Marcus), to make its final decision on rates for 2014. This is the first time the spotlight has really been on Governor Kganyago but given the current economic circumstances he’s unlikely to do anything really extraordinary. Nevertheless what he has to say at the announcement of the MPC’s decision on the repo rate might give important clues to what the future holds, particularly when we take into consideration Finance Minister Nene’s warnings of ‘pain’ for South Africa in the medium term. So it’s worth paying close attention to his briefing.

Most pundits agree that Kganyago will keep the prime lending rate steady at 5.75%. The main reason for a rate increase would be to keep inflation within in the SARB target band of 3 – 6% and thanks to a collapse in the oil price and better than expected performances (read: recovery) in the mining sector this is no longer necessary. Inflation has held steady at 5.9% through September and October and every indication is that it will be below 6% in November as well.

The South African economy remains fragile and sluggish. South Africans remain heavily in debt and the budget deficit continues to grow. Raising interest rates will not help. Dropping them might stimulate the economy but given the predatory lending practices currently in play in South Africa an increase in ‘cheap’ credit is not something we should pursue.

Consistency is what is needed now and this is what Kganyago will deliver. We believe that the rate will remain unchanged and that, barring big changes in the global economy, this will be the case until at least March 2015 (read: after Finance Minister Nene’s dreaded budget is revealed).

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