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PPS Investments: MPC Commentary

16 January 2020 Reza Hendrickse, Portfolio Manager at PPS Investments

The Monetary Policy Committee (MPC) unanimously voted in favour of lowering the repo rate by 25 basis points at the January meeting.

The committee cited continued moderation in both inflation and inflation expectations, against a backdrop of balanced risks to the inflation outlook. The South African Reserve Bank (SARB) has now provided a cumulative 50 basis points of accommodation in the current cutting cycle, which began mid-2019, when central banks globally began loosening policy.

The lagged effect of less restrictive financial conditions is expected to contribute to an acceleration in global growth in 2020, however the same cannot be said for conditions locally. Domestic growth has been weak and remains vulnerable, with the SARB revising their 2019 growth forecast down to 0.4%, while also trimming the 2020 forecast to 1.2% (from 1.4%), as well as lowering forecasts further out. The good news however, is that the local economy appears to have picked up in the fourth quarter, and the odds are a recession might have been averted.

This months’ interest rate cut is in agreement with both the market expectation of a cut, as well as the MPC’s Quarterly Projection Model (QPM). The QPM is currently predicting the possibility of a further 25 basis points cut in the fourth quarter, but any action will be data dependent. Lower rates is without a doubt consistent with the economic data on the domestic front, although the SARB considers its ability to boost demand through lower rates as limited.

The timing of this months’ cut is interesting, given that the February National Budget Speech is around the corner. This will be a key determinant of a Moody’s downgrade, and could be a source of volatility and potential currency weakness, which the MPC has typically sought to pre-empt, and counter against.

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