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By Nazmeera Moola, Co-Head of SA & Africa Fixed Income, Investec Asset Management

In a surprise move, the South African Reserve Bank (SARB) kept interest rates on hold at their September Monetary Policy Committee (MPC) meeting. The MPC vote was equally split 3-3. 

The consensus was for a 25 basis-point cut, given that the inflation outlook was largely unchanged and the growth outlook remains weak. However the SARB seems to be opting for an ultra-conservative approach. In their statement, the MPC noted that “a number of risks to the inflation outlook have increased and the MPC assesses the risks to the inflation outlook to be somewhat on the upside.”  This was changed from the July statement, where they assessed the inflation risks as balanced.  

The decision was likely driven by the combination of several very conservative members of the MPC coupled with the recent revelations around a concerted effort by several key parts of government to weaken the SARB and growing concerns around the Medium Term Budget Policy Statement (MTBPS) next month. 

The MTBPS and the reaction of rating agencies to it will be key. We know that revenues are running well behind expectations so we need to see fiscal consolidation. Will Finance Minister Malusi Gigaba pencil in significant expenditure cuts for next year?  

South Africa is reliant on foreign investors to finance the budget deficit. While foreign investors bought the whole net issuance of SA government bonds to the tune of R106bn over the year to end August, inflows have slowed down. As a result foreign, ownership of nominal South African government bonds decreased from 48.8% in June to 48.2% in August.   

While we anticipate rates to remain on hold until after the ANC’s December 2017 elective conference, two months is a long time – if the rand strengthens again, a November rate cut is possible. 

 

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