Two months may make a big difference for MPC

Johannesburg - Two months can be a long time in monetary policy as well as politics.

When the South African Reserve Bank’s rate-setting committee met in November, the rand was at a year-low, inflation expectations exceeded the 6% upper end of the target range and the bank’s forecast models showed more increases over the next two years.

This week, the Monetary Policy Committee meets in a world where the currency is at its strongest level since mid-2015, boosted by Cyril Ramaphosa’s election as president of the ruling African National Congress, causing price-growth expectations to fall.

Politics will continue to play in the back of the committee’s mind despite the favourable outcome of the ANC leadership election, especially after the party decided the central bank, which has private shareholders, should be nationalised. But slowing inflation expectations mean rate cuts are back on the table, even though few economists expect a move on Thursday.

“Things have changed,” Gina Schoeman, an economist at Citigroup Global Markets, said by phone from Johannesburg. “Rate cuts are definitely, at this point, more likely than rate hikes.”

All but six of the 19 economists surveyed by Bloomberg forecast the MPC will leave its benchmark rate unchanged at 6.75%. Five predict a quarter percentage point cut and one, Abri du Plessis at Gryphon Asset Management, says the committee will lower the rate by half a percentage point. 

Inflation slows

“Inflation is probably going to drop now, or in the next month or so, and it is going to be more difficult for them to cut rates later” when price growth may resume an upward trend, he said from Cape Town.

Inflation expectations, as measured by the five-year breakeven rate, have fallen 51 basis points since November 23, when the MPC voted unanimously to keep borrowing costs unchanged. Price growth slowed to 4.6% in November.

Forward-rate agreements starting in 12 months, used to speculate on borrowing costs over the period, show investors have moved to pricing in 44 basis points of rate cuts this year, compared with 52 basis points of tightening four days before Ramaphosa’s election.

The leadership change helped the rand to its best monthly rally since 2009 in December.

The ruling party’s highest decision-making body will discuss its decision about the central bank’s ownership at a meeting that starts on Thursday, the head of the ANC economic transformation committee, Enoch Godongwana, said.

While Ramaphosa said on the weekend the mandate and independence of the central bank won’t be meddled with, the announcement may play on the MPC’s mind as it debates policy, according to BNP Paribas’ senior economist, Jeffrey Schultz.

“They will hold for now, but I do think that the committee will be a little bit more divided,” Schultz said by phone. “Politics has become an increasingly important part of the way you view South Africa and the economy.”

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER