Interest rates commentary - Chief Economist at Old Mutual Investment Group

Commentary from Rian le Roux, Chief Economist at Old Mutual Investment Group, on the Reserve Bank’s decision to keep interest rates unchanged following the monetary policy committee (MPC) meeting this week:

The Reserve Bank’s decision to keep interest rates unchanged following the monetary policy committee (MPC) meeting this week is consistent with expectations. 

The economy remains under pressure and early indicators for Q3 point to renewed weakness after the Q2 rebound. The bottom line is that the Q2 number does not mark the start of a strong rebound in the economy, as consumers remain under pressure and business investment is actually contracting as prospects remain bleak and confidence deeply depressed.  

With the inflation peak – 7.0% in Feb 2016 – likely behind us, we think the rate hike cycle is done, barring a few scenarios. 

The first of these is a sustained slowing in global growth. If a global slowdown were to significantly impact on commodity prices and the Rand, the SARB will have little choice but to hike rates again.  If global growth is soggy, but not bad enough to hit the Rand and commodity prices, the SARB will likely stay on hold until it is comfortable with the local inflation outlook. 

Another variable that could influence the SARB this year is a US rate hike before year end. Should this happen, it might still firm up the USD and negatively affect the Rand and commodity prices.  However, I am less concerned over a renewed Rand slump from a global perspective. It is potential South African specific incidents, especially around politics and the risk of a ratings downgrade(s) towards year-end, that concerns me more. 

Outlook for 2017 rates 

With the Rand currently firm, demand weak and grain prices falling, inflation should ease in 2017, after rising for base effect reasons in the second half of 2016. We think conditions might well fall in place for the SARB to start considering lowering interest rates later in 2017. The extent of any such cuts will depend on the inflation outlook at that stage, including the behaviour of the key volatility drivers of inflation – the Rand, oil and food – and unfolding inflation expectations. We expect inflation to average a little under 5.5% in 2017 

The state of the economy will obviously also influence the SARB’s decisions in 2017.