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SARB Hold Decision Takes On Hawkish Tones

SARB Hold Decision Takes On Hawkish Tones

No change on the interest rate front may have resulted in South Africans mistakenly thinking that there was no news or no change from where we stood in March. The truth is, however, that there appears to have been a major shift in outlook with regards to the type of interest rate cycle we may be heading towards.

After the narrow Monetary Policy Committee (MPC) vote that lead to a welcomed interest rate cut in March 2018, the tone of the South African Reserve Bank (SARB) has without doubt taken on a more hawkish note. For the moment however, interest rates have been kept unchanged. On Thursday 24th May 2018, the MPC voted unanimously (7-0) to keep rates on hold.

This means that the repurchase/repo rate, (the rate at which the SARB lends money to banks), will remain unchanged at 6.5% and the prime lending rate, (the rate at which banks lend to consumers), stands firm at 10%.

What the headlines don’t reveal is how expectations have turned from a gradual decreasing interest rate environment to an environment where the next move may be to the upside.

The factors considered

In his MPC statement, Lesetja Kganyago, Governor of the South African Reserve Bank, made mention of a number of considerations that led to the hold vote. Among the factors that were specifically listed, were:

1)     The strengthening US dollar and higher US long-bond yields which in recent weeks, have resulted in a drastic reduction of capital flows into emerging markets globally.

2)     Rising oil prices, which have and could continue to impact inflation locally, to the upside.

3)     Disappointing growth data in the first quarter of 2018 from a number of our local sectors.

4)     The consumer price index for all urban areas, reached a seven-year low of 3.8% in March 2018 but increased to 4.5% in April, as the impact of the VAT increase and other taxes had an impact.

5)     Similarly, both goods price inflation (up from 2.6% to 3.5%) and services price inflation (up from 5.1% to 5.3%) saw increases.

6)     Employment trends remain a cause for concern.

7)     Electricity tariff uncertainty (Eskom’s application for an increase in the order of 30%).

These factors combined make for a compelling case to hold rates for the time being. If anything, continued data of this sort may usher in an interest rate hiking cycle.

The interest rate outlook

While inflation appears to have fallen nicely within the SARB target range, the probability of an increase in inflation has risen significantly due to the ever-increasing volatility of the global economic backdrop. Challenges in the form of international trade disputes (e.g. US and China tensions) rank among the concerns that have investors worried.

On a positive note, improved clarity in policy-making locally and rising business and consumer confidence, despite the sore subject of land expropriation without compensation, appear to be offering a way out for the economy. The MPC have indicated that growth hopes are largely pinned on the South African consumer. It remains to be seen whether the indebted consumer can take on the role of growth stimulator however. The SARB’s forecast for GDP growth is unchanged at 1.7% for 2018, but has been revised up from 1.5% to 1.7% for 2019. The forecast for 2020 is unchanged at 2.0%.

On the currency front, the governor’s comments suggest that continued dollar strength is by no means a certainty. In respect to the rand, he noted “In the near term, the rand is expected to remain volatile, with movements dominated by the changing assessment of [global trends]. [An] expected moderate widening of the current account deficit, a result of deteriorating terms of trade, could also weigh on the rand.”

Point six in the factor list above may have surprised some readers, considering that the latest figures showed a decrease in unemployment from 27.7% to 26.7% between the third and fourth quarter of 2017, this after reaching a 14-year high. It must be noted however, that the percentage drop was in part due to an increase in discouraged workers, choosing to cease their job seeking efforts, highlighting the difficulty of finding work in South Africa. While the growth forecast has improved somewhat, especially in 2019, it still remains far too low to make a serious dent in the unemployment number.  

Certainty around electricity tariff changes should come in June, as NERSA are scheduled to respond to Eskom’s worrying 30% increase proposal. The SARB have factored in an 8% increase from mid-2019.

Finally, the model used by the SARB to project a glide path for rates is now reflecting an increase of 25 basis points in the last quarter of the year (perhaps at the November meeting). A further increase is projected for the middle of 2019 and two more hikes during 2020.

Remaining Monetary Policy Committee Meetings for 2018:

17-19 July 2018

18-20 September 2018

20-22 November 2018






Reading through the MPC statement and considering the variables at play and the projections of the model, this latest vote to keep rates on hold was most certainly not a case of “no change, no news”.





Mark Mayer 
Investment Specialist at Discovery Invest

Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at: markm@discovery.co.za

The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.


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