July rate cut on the cards as Reserve Bank turns dovish

The Reserve Bank has prepared investors for a cut in interest rates that some economists say may come in less than two months.

The Bank, which kept interest rates unchanged on Thursday, downgraded its 2019 economic growth forecast and said inflation would stay close to the mid point of its target range.

Governor Lesetja Kganyago also disclosed that two members of the five-person monetary policy committee (MPC) voted to cut the repo rate immediately, making this the closest call since their meeting in November 2018, which ended with a 25-basis point increase to 6.75%. The MPC next meets on July 16-18.

The rand declined and bonds advanced on Thursday, with the currency breaking through the R14.50/$ level for the first time in over two weeks. It was 0.7% weaker at R14.473/$ after the JSE closed.

SA’s currency fell 0.72% to R18.341/£ and depreciated 0.72% to R16.1459/€.

Lower rates reduce the attractiveness of holding the rand versus assets denominated in foreign currencies.

For President Cyril Ramaphosa, the outcome of the meeting is a mixed bag.

While the government will welcome the prospects of lower rates, the downgrading of the growth forecast is just

the latest signal of the challenges it faces to boost the economy and make some inroads against an unemployment rate, including discouraged work seekers, of 38%.

Gains in the bond market pushed the yield on the R186 bond maturing in 2026 down by two basis points to 8.405%. Yields move inversely to the price and bonds benefit from lower interest rates because that makes their fixed coupons more attractive relative to cash.

The prospect of lower rates failed to lift banking stocks on the JSE, which fell as the broader market followed its global counterparts lower as trade tensions between China and the US persisted. A cut in interest tends to boost demand for loans among business and consumers, while reducing the risk of defaults.

The MPC may cut interest rates as soon as its next meeting, according to Investec Asset Management and Capital Economics. "Today’s speech has led us to move our forecast rate cut" to July, said Capital Economics economist John Ashbourne, who initially forecast that a reduction would only come in the last three months of 2019. "The precise timing of the move is, admittedly, finely balanced."

SA’s economy, which was hit by Eskom power cuts and the five-month strike at Sibanye-Stillwater, contracted in the first three months of the year, the Bank estimated.

That led to it shaving 0.3 percentage point off its full-year growth forecast, predicting an expansion of just 1%. It sees the economy expanding 1.8% and 2% in the following two years, unchanged from its March forecast. Stats SA is due to release the first-quarter GDP numbers early in June.

"The MPC assesses the risks to the growth forecast to be on the downside," Kganyago said.

"Weak business confidence, possible electricity supply constraints and high debt levels in certain state-owned enterprises will continue to limit investment prospects."

Other risks to growth include a slowdown in global trade as a result of the dispute between China and the US, and uncertainty over how Brexit will play out. The Bank said on Thursday that its model suggested a 25-basis point cut by the end of the first quarter of 2020, compared with its previous signal of a hike by the end of 2019. It expects headline inflation to average 4.5% in 2019, down 0.3 percentage point from what it was forecasting at the March meeting.

A "logical conclusion" was that the Bank would cut rates at the July meeting, "barring any major rand weakness in the intervening period", said Nazmeera Moola, head of investments at Investec’s asset management unit.

While the MPC, which came under heavy criticism when it raised rates late in 2018 despite signs of an improvement in the inflation outlook, welcomed the continued downward trend in inflation outcomes and expectations, it wanted to see the rate staying close to the mid point of the 3%-6% target range "on a sustained basis", Kganyago said on Thursday.

Kganyago also announced that Christopher Loewald, the head of the policy development and research department, would join the MPC on June 1. With Karl Gernetzky