Nazmeera Moola looks ahead at tomorrow’s interest rate decision by the South African Reserve Bank.
Lindsay Williams: Today the Monetary Policy Committee of the South African Reserve Bank convenes its meeting. Tomorrow it will conclude probably round about 3 o’clock South African time and will decide on interest rate policy for the Republic of South Africa.
On the telephone now to predict what might happen is Nazmeera Moola, Co-Head of Fixed Income at Investec Asset Management in Cape Town. Nazmeera, I suppose the backdrop to this is the South African Consumer Price Inflation Index which came out today. Tell us about that first please.
Nazmeera Moola: Hi Lindsay. The inflation [audio 00:57] for June which came out today was a fair bit lower than expected. So the consensus expectation was [audio 01:04] year-on-year. It came out at 4.6% year-on-year and, more interesting, a lot of the reasons for the surprise was the fact that rentals are not rising as fast as expected. We have seen a significant deceleration in rental increases across the major metropolitan areas in South Africa over the course of the last year.
Lindsay Williams: That is interesting. I didn’t realise that was such a big weighting within the CPI but the other point is that, looking forward, what do you think? The figure that we saw today is one thing. What about the future? Do you think that with the rand – it’s been fairly good actually. It has gone from the 13.90’s to the 13.20’s over a period of round about two weeks but it is still on a downward trajectory. Do you still think that inflation is on an upward trajectory because of that?
Nazmeera Moola: I think inflation has bottomed. We saw the bottom a few months ago but I don’t think the increase in inflation is going to be very marked because demand remains very weak and, as much as the currency has weakened from the 12.30 level to the 13.30 level, it has still appreciated and I think that combination, together with the weakness of demand in the economy, is going to keep inflation under control.
Linsay Williams: Food price inflation remained low at 3.1% year-on-year in June. The oil price has gone from almost $80/barrel round about 10 days ago down to around $71, $72/barrel, which is an encouraging sign but, of course, we still have record high petrol prices. Will that continue to weigh on inflation?
Nazmeera Moola: That has driven a lot of the increase in inflation we have seen so far. Aside from the rentals category, the other two sources of surprise were lower than expected food inflation and the other was lower than expected fuel inflation because diesel prices have risen by less than petrol prices. Into next month, remember the petrol price in South Africa is regulated and it is set on the previous month’s average rand petrol equivalent price and therefore the decline we are now seeing in oil prices is going to result in a fall in prices next month.
Lindsay Williams: Okay. So there are all sorts of different inputs and outputs here and all those inputs and outputs are going to have to be factored into the Monetary Policy Committee which is sitting now and will, of course, tell us their result tomorrow. What is the result going to be? It is obviously going to be a flat-liner but will there be any surprise in the post flat-liner rhetoric?
Nazmeera Moola: So rates on hold is the unanimous verdict for every economist in the market and I certainly don’t disagree with that. I think that, given the weakness of the Q1 growth number, given that inflation continues to remain subdued, the tone of the MPC statement that accompanies is likely to remain reasonably balanced.
If we go back four weeks ago, given the weakness we had seen in the currency, this big [blot] in emerging markets, this huge sell-off in South African bonds, I think the general expectation was we would get a very hawkish July MPC statement and I think the data that we have seen means that it could be a little bit neutral. I don’t think they are going to leave room for us to expect rate cuts but I think they will [dial] back the threat of rate hikes that would have been expected a month ago.
Lindsay Williams: Yes, indeed. Of course, with the South African Reserve Bank, they always have this problem with almost zero growth in the country but the potential of rising inflation and they have to remain very balanced in their view. It must be very difficult for them not to be influenced by political and international events.
Nazmeera Moola: I think the international events certainly weigh on them at this point in time. I think you have got some very focussed people on the committee who focus on the translation of those events into the economics. So does Trump’s rhetoric and the trade war with China matter? Not in and of itself. Where it matters is if it results in weakness in the Chinese economy, resultant weakness in commodity prices, which result in lower growth in South Africa but also a weaker currency. That is the transmission mechanism they would be concerned about.
Lindsay Williams: Okay. So it is going to be a flat-liner tomorrow, that’s your opinion. When is there going to be a change? When I mean a change, I mean an up or a down in the repo rate.
Nazmeera Moola: I think the MPC’s combined preference at this point in time is to keep rates on hold for as long as possible. I think they are aiming for stability. If the inflation outlook continues to improve, there may be room to cut 25 bps at some point. That seems unlikely at this point and I think they are going to look to avoid hiking for as long as possible. So the preference I think would [audio 05:54] to hike rates. That would be preference. The wild card is if you get some sudden weakness in the currency which forces their hand.
Lindsay Williams: In other countries, and I will call them the developed world countries, interest rates are sometimes used politically. In South Africa, I don’t think that the political influence of an interest rate cut or an interest rate hike is that influential but do you think that there is any chance that they might be looking at the 2019 elections and say ‘we can’t hike rates and make money more expensive for the South African populace’?
Nazmeera Moola: I think the South African Reserve Bank over the course of the last 20 years has shown itself to be completely independent and its interest rate setting policy is almost fundamentally independent, so I think that would have very little bearing on the matter.
Lindsay Williams: And long may that continue. Nazmeera, thank you very much for your brief time this evening. That is Nazmeera Moola, the Co-Head of Fixed Income at Investec Asset Management in Cape Town.
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