Why South African Reserve Bank Won’t Reduce Rates Until 2019

Fast rising markets economist Peter Montalto of Nomura is of the view that the South African Reserve Bank (SARB) will not reduce its repo rate of 7% until 2019.

“Our baseline remains that the SARB will not cut rates,” he said in a note to investors on Tuesday. “Indeed, we see the hurdle to cuts as very high through end-2018.”

Montalto said while there is a “strong view in the market that the SARB is opportunistic and will look for any excuse to cut, we think this couldn’t be further from the reality”.

“In our view, the SARB – within a context of three FOMC (US Fed) hikes this year, downgrade and political risk, a dual deficit and structural issues as the key driver of growth – is even for the most dovish members not in a mood to try and steal an odd 25 basis points cut here and there.”

“In fact, we think the SARB is broadly happy sitting just below a neutral level of rates,” he said. “It would fear having to reverse course with such a backdrop this year.”

Bloomberg reported on Monday that most economists believe the only thing standing in the way of rate cut is a political event between now and the SARB’s Monetary Policy Committee (MPC) meeting from March 28 to 30 meeting.

It reported that the rand gained 5.2% to the dollar in 2017, the best start to a year since 2012. The drought has ended and inflation eased to 6.6% in January, the first slowdown in five months.

Statistics South Africa’s latest data that revealed growth contracted by 0.3% in the fourth quarter of 2016. Overall GDP grew by 0.3% in 2016. This is lower than growth of 1.3% reported in 2015.

“GDP data show that there is little momentum in the economy and still negative per capita income growth,” Montalto said. “The ‘off the bottom’ narrative in this sense is pointless if there is no momentum to take you somewhere better to positive per capita income growth.

“There is no particular surprise versus the growth narrative for the SARB, which has been laid out in MPC statements since even 2012,” he said. “Low growth is mainly driven by structural and not cyclical factors and the output gap (while there) is not therefore particularly large.

“There was nothing we think in today’s data that would prompt a shift in this structural view.

“After 0.3% in 2016 (ie, a lower base), we shift up 2017 marginally to 1.1% from 1.0%, we keep 2018 at 1.5%.”

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