Rates Watch January 2018: New Year, Same Rate?

Today will see the announcement of the decision taken at the first meeting of the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) for 2018 and, more importantly, the first since the ANC’s electoral conference in December 2017.

During SARB Governor Kganyago’s speech we will be told what the interest rate will be, at least until the next meeting in March. This will impact the cost of lending and price of doing business and we’ll also get a glimpse into the thinking of the Committee. This glimpse will be critical in understanding what the SARB thinks the coming year will look like and, as it stands now, that glimpse might be more important than whatever the decision over the rate is. This is thanks to the potentially massive changes in the ANC and by extension the Government.

There has been a distinctly positive shift in sentiment in the wake of the ANC’s replacing Jacob Zuma with Cyril Ramaphosa as the new ANC president. So deep is the negativity around the name “Zuma” that when a rocket sharing the name went missing the headlines this created caused the Rand to gain 10 cents against the dollar (no really). When it became clear the President was still around and the rocket was not, the currency dropped again.

Across the last few weeks the Rand, while remaining volatile, traded at a sustained strength not seen for months. This will definitely have downward pressure on inflation, the key indicator tracked by the SARB.

Inflation will be dragged down because Rand strength makes imports and oil cheaper, in turn reducing the cost of both doing business and simply living in a country heavily dependent on imports. Another factor that will rein in inflation is the decision by NERSA to limit Eskom’s tariff increase to just over 5% instead of the nearly 20% it was looking for.

But political situation is far from certain and the Rand is fickle (or, more accurately, the currency speculators and traders are) and these gains can evaporate in the matter of days. Eskom too is fighting the decision and will eventually receive further hikes in the years to come anyway.

So then how much impact will these positives have? A rate cut at this point is unlikely.

Moody’s decision next month will be critical to the economy and SARB will want to maintain stability in the face of it. Though there is the chance that Ramaphosa’s victory alone might be enough to stave off a downgrade this kind of gamble is not what the SARB, thankfully, is known for.

Additionally, I believe that the SARB will want more evidence of sustained improvements and the benefits these are expected to produce. Sentiment is as changeable as the sea and it is the policies and politics of the Zuma to Ramaphosa transition that will be most telling in determining the trajectory of the economy.

This means waiting for reports on the performance of the economy in the final quarter of 2017 and the first months of 2018, they will pay close attention to the amount of spending by both consumers and business (a key indicator of confidence) as well as inflation.

And of course the opening of Parliament and the budget speech in February will be particularly critical as there are many questions regarding the ability of the state to continue its increase in spending on Tertiary Education.

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