All eyes on Kganyago’s decision on interest rates

Lesetja Kganyago, governor of South Africa’s central bank. Photo: Bloomberg

JOHANNESBURG – South African market players will be keeping a close eye on SA Reserve Bank (Sarb) governor Lesetja Kganyago this week as he announces the interest rate decision of the Monetary Policy Committee (MPC), with economists expecting rates on hold until later this year.

The rand gained ground against the dollar in intraday trade on Friday at R13.82, still gaining traction on a dovish US Federal Reserve. 

Fed chairman Jerome Powell said this week that the central bank could be patient on monetary policy given that inflation remained stable, which led to the dollar sliding on expectations that US interest rates may be raised only once or not at all in 2019.

Chief economist at Investec Annabel Bishop said this week that South Africa was not expected to hike interest rates at the MPC meeting next week, nor  in the first half of this 

“Contrary to the timing of the last MPC meeting in South Africa (in November), the start of 2019 has seen risk-aversion abate somewhat in global markets as commentary from US monetary authorities has become less hawkish.”

She said concerns over global growth had come to the fore, as had the recent weakness of global markets. 

“Domestically, risks for South Africa abound, ranging from fiscal performance, and particularly the threat of credit rating downgrades, to the upcoming national election, which is likely to see amplified political uncertainty and populist rhetoric.”

She said the outlook for consumer price index inflation in 2020 was key to the MPC’s current inflation- targeting process, with CPI inflation expected at around 5.6 percent year-on year for 2020, close to the upper limit of the 3-6 percent range of the inflation target.

Absa’s Corporate and Investment Banking unit said in its South Africa Quarterly Perspective that with scant inflation and low oil prices, it believed the Sarb would leave rates on hold until demand recovers – unless the rand weakened sharply. 

“The market recently shifted to price in much less tightening this year. We forecast the next 25bp (basis points) rate hike in September.”

The MPC meeting comes after a gloomy World Bank report was released this week, forecasting 
lower South African and global growth. 

The World Bank revised down its June 2018 estimate of 1.8 percent growth for the South African economy this year to a lacklustre 1.3 percent and a subsequent recovery to 1.7 percent in 2020-21, citing high unemployment, slow growth in household credit extension, and fiscal consolidation which limits government spending.

The global economy was expected to slow to 2.9 percent this year, compared with 3 percent last year.

Growth in the US is expected to slow to 2.5 percent this year from 2.9 percent in 2018, while China is expected to grow at 6.2 percent this year compared, with 6.5 percent last year, the World Bank said. 

“The outlook for the global economy has darkened. Financing conditions have tightened, industrial production has moderated, trade tensions have intensified, and some large emerging market and developing economies have experienced significant financial market stress,” the bank said. 

“Faced with these headwinds, the recovery in emerging market and developing economies has lost momentum.”

It also comes at a time when South Africa has been battling to stave off a credit-rating downgrade from Moody’s Investors Service that could see a sell-off in local-currency bonds.

Absa said a further downgrade from Moody’s could not be ruled out after elections

Local economists reacting to the World Bank forecast said this week that they expected a grimmer outcome this year, with a sovereign ratings downgrade in a few months due to electricity supply scares, protracted labour disputes and policy uncertainty ahead of the 2019 elections.

Moody’s has South Africa’s rating at Baa3, one notch above sub-investment grade. The agency has a stable outlook for South Africa and out of the three main agencies, it is the only one to have the country above junk status.

“However, with stable outlooks on their ratings, all three rating agencies will likely give warning of any potential move by cycling through a directional outlook change first. Moody’s is due to opine next on March 29,” it said.

Bank of America Merrill Lynch in a note issued this week predicted South Africa’s public debt to rise above 56 percent of gross domestic product this year and the fiscal deficit to reach 4.3 percent.