Rates Watch March 2018: Finally, a “good story to tell”?

While Zuma’s relatively painless (as yet) fall from power is undoubtedly a great positive for the country it is not and could never be a panacea for all that ails us. And as we enter the 2nd quarter of 2018 some of the luster is already wearing off as this reality slowly dawns.

Even so, most economists are predicting a 25 point drop (going from 6.75% to 6.5%) in the interest rate at today’s SARB Monetary Policy Committee (MPC) meeting. Indebted consumers (i.e. most South Africans) are praying that they are right. But is it a foregone conclusion?

When considering the inflation figures alone it seems that it is! February saw the inflation rate dropping to its lowest level, 4%, since March 2015. This is the strongest argument for a rate cut as the SARB’s monetary policy is primarily driven by what the inflation rate is doing. The SARB has set a target band of an inflation rate between 3% to 6% and in order to keep it from going too high the SARB raises the rate (and vice versa). The inflation rate has now been below 5% for more 5 months giving South Africa’s central bankers breathing room of a kind that they very rarely get.

Aside from inflation, the lowering of the rate might also provide stimulus to the economy as consumers and business find their debts easier to service and have more cash to invest or make purchases with. The stubbornly high unemployment figures might benefit from this as both new business projects are started and an uptick in consumer spending drives hiring.

The recent VAT hike to 15% (from 14%) might also see the SARB encouraged to reduce the rate as a means to alleviate some of the pressure on the poor who are now paying more for goods and services. Ironically the strongest argument against a reduction in a rate is the VAT increase: only introduced at the end of last month and to be implemented on the 1 April 2018 this might see a dramatic spike in inflation as prices increase, literally overnight.

Along with the increase to VAT, the government has also raised the fuel levy and this increase will have upward pressure on inflation as the costs to transport food and consumer products increases. Pressure that was already being applied, though ameliorated somewhat by Rand strength, as the oil price continues a slow but steady recovery from its lowest levels.

Another concern is the fact that the US Federal Reserve, along with some European counterparts, are on a rate hike increase cycle. Why is the a problem? While we’re reducing interest rates it makes other, safer markets, are increasing their interest rates making the argument for leaving cash in their economies (and not investing in ours) stronger.

All in all I don’t believe that these arguments against are strong enough to overcome the positive impact of the sustained lower level of inflation particularly when the SARB is not famous for taking preemptive action. A rate decrease of 25 points is therefore the likely outcome though keeping the rates on hold might not be out of the question. Whatever happens Governor Kganyago’s speech will be well worth listening to as he reveals the MPC’s thoughts on the coming months.


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