An improvement in the inflation outlook and suggestions that economic growth may not recover to the extent previously expected will likely convince the South African Reserve Bank (SARB) to keep the repo rate unchanged at 6.75% on Thursday.
The bank’s Monetary Policy Committee (MPC) pre-emptively started its hiking cycle in November and signalled that three more hikes of 25 basis points may bring the repo rate to 7.5% by the end of 2020, although it stressed that decisions would be data-dependent.
As such, the MPC’s announcement is unlikely to surprise market watchers, yet governor Lesetja Kganyago’s comments will be closely watched for clues on several issues.
1. Political noise
With the national election approaching, the first few months of 2019 were bound to be characterised by political noise.
In its election manifesto, the ANC said the SARB must pursue a “flexible monetary policy regime”.
“Without sacrificing price stability, monetary policy must take into account other objectives such as employment creation and economic growth,” it said.
On Wednesday, President Cyril Ramaphosa tried to allay fears that the SARB’s independence was under threat when he addressed a business delegation ahead of the World Economic Forum in Davos. There have been ongoing debates around the nationalisation of the SARB, something that is often confused with a change in its mandate.
The ANC’s manifesto was silent on nationalisation, and seems to have instead pushed for a change in the SARB’s mandate. But Ramaphosa denied that the party was advocating to change the bank’s mandate, which makes it difficult to ascertain what the party’s intention really is, perhaps underscoring that the leadership is not on the same page on this issue.
Although Kganyago will probably shy away from answering political questions, the issue is likely to be raised.
2. Hawks and doves
During its November 2018 meeting, three MPC members voted to hike rates while three advocated for rates to remain unchanged. Kganyago – a known hawk – cast the deciding vote.
On January 2, the SARB announced the resignation of deputy governor Francois Groepe with effect from January 31.
In an emerging market report, analysts at Investment bank UBS say they expect the MPC to keep a hawkish stance in 2019.
“However, changes to the monetary policy committee could alter the policy stance. The recent announcement that deputy-governor Francois Groepe will leave at the end of January was a surprise to market participants and raises the question [of ] who will succeed him.
“As he was seen as hawkish, a more growth-oriented successor could lower the likelihood of further rate hikes.”
Kganyago’s term comes to an end in November.
“Another term would be seen as a sign of policy continuity. Both appointments will be decided on by the president and should be monitored closely.”
Over the last few years, South Africa has continually had to revise its economic growth forecasts downward.
This was also the case for the SARB, which expected growth of 1.4% for South Africa at the beginning of 2018, an expectation it gradually lowered during the course of the year to reach 0.6% by November.
The World Bank recently cut South Africa’s growth forecast for 2019 to 1.3% from an earlier 1.8%. UBS expects GDP growth to rise modestly to between 1% and 1.5% this year.
During its November meeting the MPC expected growth of 1.9% in 2019 and 2% in 2020, forecasts that may no longer be realistic.
Together with an improved inflation outlook on the back of a stronger rand and weaker oil prices, it will likely sway MPC members to keep rates on hold, but weaker growth projections will be of concern as the country’s finances are already under pressure. National Treasury’s forecast for real GDP growth in 2019 was 1.7% during its medium-term budget policy statement.
Moody’s, the only rating agency that still considers South Africa’s rating to be investment grade, anticipates that Africa’s most industrialised economy will see real GDP growth of 1.3% in 2019.
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