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Is it the end of the interest rate cutting cycle

25 May 2018 Luigi Marinus, PPS Investments
Luigi Marinus, Portfolio Manager at PPS Investments.

Luigi Marinus, Portfolio Manager at PPS Investments.

The South African Reserve Bank Governor, Lesetja Kganyago, announced the view to keep interest rates unchanged at 6.5% and is aligned to market expectations. The outcome was anticipated due to the initial effects of the 1% VAT rate increase manifesting in the latest inflation figure, which rose to a four-month high from 3.8% in March to 4.5% in April.

In an attempt to better understand the conundrum of the Monetary Policy Committee (MPC) being unwilling to cut interest rates when inflation is at the midpoint of the 3% to 6% target band, one needs to consider the expectations of the factors at play.

Firstly, inflation has been kept low - in part by significant rand strength and due to the low oil price. With the oil price closer to $80 per barrel, it can no longer be considered relatively cheap. In turn, this will lead to fuel price hikes placing additional pressure on inflation. From current levels, the rand is unlikely to dampen this effect.

Another consideration is the global backdrop. With the US in a rate hiking cycle with a view to continue hiking this year, moving against this trend could prove difficult, especially for emerging market economies.

These factors could very well spell the end of a short rate cutting cycle in South Africa.

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