The Reserve Bank’s monetary policy committee (MPC) starts its May meeting on Monday against the backdrop of a landmark national election that is likely to keep the committee cautious in its signals.
The committee, which last changed interest rates a year ago, is universally expected to hold yet again.
Some economists say recent dovish economic numbers suggest there’s scope to start signalling rate cuts ahead. Others believe the committee is waiting for the US Federal Reserve, which has lately been making hawkish noises signalling rates could stay high for much longer.
But most expect the MPC to stay non-committal given the impact SA’s election outcome could have on the rand and hence on the inflation outlook.
The election results are expected to prompt a rand rally even if they yield the market’s “base case” scenario in which the ANC gets 45%-50% of the vote and forms a coalition with smaller parties.
Equally, the election could cause a rand crash if the ANC’s vote share falls as low as 40% and it looks likely to opt for the market’s “worst case” scenario of a coalition with the EFF and/or uMkhonto weSizwe.
And there is still huge uncertainty about when the US Federal Reserve might implement its first rate cut — and what this will mean for the dollar and for emerging-market currencies such as the rand.
This week’s three-day MPC meeting takes place at a time when the Bank has stepped up calls for the inflation target to be lowered towards 3%, to make SA more competitive and bring it in line with emerging-market peers. The Treasury indicated earlier this year that it would review the target, but this may or may not be a priority for a new post-election administration.
This week’s meeting is the first to include the Bank’s new deputy governor, Mampho Modise, who was appointed to the post by President Cyril Ramaphosa in March. That will bring the committee back to six members, up from five, for the first time since March 2019.
Citi economist Gina Schoeman said the Reserve Bank “is expected to keep the repo rate unchanged in a unanimous decision not only because the decision comes a day after the elections (posing many unknowns) but also because inflation risks remain on the upside and inflation expectations are still too high. This is against a backdrop of increasing talk of dropping the target.”
Citi said last week its emerging-market monetary policy calls had recently tilted to a hawkish bias because of spillovers from the risk of a “high for longer” Fed, which could affect trade as well as capital flows and exchange rates.
However, Goldman Sachs economist Andrew Matheny said incoming SA data were unambiguously dovish. “Sooner or later the committee will need to take these into account, but I don’t think the day after the election and before the results are known is the time to do that,” Matheny said.
The data showed the oil price coming off and food prices continuing to fall.
The rand had strengthened from around R19/$ to low-R18/$ and the biggest surprise was in the fiscal data, which showed the Treasury had met or beaten its fiscal targets thanks to tight expenditure control, he said.
The Bank has repeatedly expressed concern about SA’s fiscal situation and effect on the currency and the borrowing costs of the associated risk premium. Goldman Sachs still expects a first rate cut in the third quarter of this year, in September or even July.
Others expect a first cut later, possibly even in 2025.
Domestic fund managers surveyed by Bank of America Securities now expect the first rate cut in the fourth quarter of this year, whereas a month ago they expected it in the third quarter. They have also raised their expected average for the benchmark repo rate to 7.56% over the next 12 months, up from 7.51%. Their 12-month average rand forecast is steady at about R18/$. A majority said monetary policy was “too restrictive” but no-one expected inflation to go a lot lower in the next 12 months.
Prescient Investment Management’s Reza Ismail said the SA economy was completely devoid of demand-side pressures that would fuel inflation, but the committee tended to defend restrictive interest rates on the grounds that inflation expectations were still too high.
A Bureau for Economic Research economist said the Fed’s June meeting would provide more insights after the latest Fed meeting minutes confirmed a hawkish stance. Markets anticipate two cuts starting in September and it is now expected Europe could “decouple” from the US, with the European Central Bank expected to cut rates in June.
The rand was trading at more than R18.90/$ when the committee last met in March. It had since strengthened, in part because newer election polls suggest a “worst case” coalition scenario is less likely, but also because of more benign US inflation numbers. It has fallen back in the past couple of weeks on more hawkish signals from the Fed, but at R18.42/$ is still stronger than in March.
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