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Markets may have stabilised but the Reserve Bank finds itself in a quandary

19 May 2016 Sanveer Hariparsad, Prescient Investment Management
Sanveer Hariparsad, Portfolio Manager at Prescient Investment Management.

Sanveer Hariparsad, Portfolio Manager at Prescient Investment Management.

The rand has been relatively settled since the April MPC meeting but it has been a case of dollar weakness as opposed to rand strength. This is due to US corporate earnings being below expectations coupled with low inflation and a mixed jobs report, according to Sanveer Hariparsad, Portfolio Manager at Prescient Investment Management.

“The real exchange rate is 2.4% stronger from the last meeting, which is a small victory, given that it has depreciated 17% in real terms over the last year,” he said.

“Inflation projections from the SARB have been lowered slightly to 6.4% from 6.6% in 2016 and to 6.2% from 6.4% for 2017; mainly due to the earlier peak in food inflation and lower than expected Eskom tariff increases. Core inflation was a surprise with a downside reading of 5.4% from 5.7%, which may give the Reserve Bank an opportunity to pause.”

He added that the SARB has been fairly aggressive in its monetary policy stance by raising rates 100bps over the last six months. The effects of which have not yet filtered through into the economy. Economic growth is forecast to be sub 1% this year and following the gloomy mining production numbers this has prompted a number of analysts to downgrade their growth forecasts further.

“The MPC does seem tolerant of a temporary breach of inflation above the 3 to 6% target band so will welcome an opportunity to pause given the lacklustre growth outlook,” pointed out Hariparsad.

Moody’s recently affirmed South Africa’s long-term credit rating at Baa2 (two levels above sub-investment grade) with a negative outlook which surprised most investors who expected Moody’s to downgrade SA by one notch, in line with the other agencies.

“Moody’s projects economic growth to improve next year with a trough this year. The government debt to GDP ratio should be stabilised by the aggressive consolidation in the 2016 Budget and recent political developments, which highlight the soundness of the country’s institutional investor base.

“S&P’s decision in June remains another milestone that market participants will eagerly await. The forward rate agreement which looks at markets expectation of the three-month rate is only pricing in a 40% probability of a 25 basis point hike with the majority of economists opting for an unchanged repo rate. The split decision at the last MPC meeting will make this a closer call than what is currently priced into the market but a pause would seem like the more measured approached,” concludes Hariparsad.

 

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