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Investment views

Podcast: SARB unanimous on interest rate hold

25 May 2018

Nazmeera Moola unpacks yesterday’s decision by the South African Reserve Bank to keep interest rates on hold.



Lindsay Williams: The South African Reserve Bank’s Monetary Policy Committee left interest rates in South Africa unchanged today.  Following up on a preview of that meeting that I had with Nazmeera Moola, Co-Head of Fixed Income at Investec Asset Management, Nazmeera is on the telephone again now to talk about that decision.  Naz, as expected, anything strange or interesting or quirky in the post-decision statement?

Nazmeera Moola: Good evening, Lindsay.  I think the slight surprise was that all seven members of the MPC voted to keep interest rates on hold.  The statement was a bit more hawkish than the one they issued in March but that is not surprising.  The world has moved in a direction that is less favourable to the South African inflation outlook in that period.  So I think no big surprises but the Governor is intent on trying to entrench expectations of a sub-5% inflation outlook in South Africa.

Lindsay Williams: Yes. And given the CPI data that we have had this week of 4.5%, and you were absolutely right when the market was expecting 4.7 or 4.8%, you said you thought it would be 4.5% and came in bang on.  He must be in the sweet spot at the moment. But did he highlight dangers in the future? In other words the oil price, the weakening rand and also the risky asset classes as highlighted by the Fed last night may be coming under pressure because of certain things like trade wars. Did he bring all those points in?

Nazmeera Moola: Definitely. So what we saw was the bank talking about the fact that the risks to the inflation outlook have tilted to the upside. In March, they were talking about balanced risks; this time around tilted to the upside. The primary driver is the higher oil price. They have $70/barrel for 2018 in their inflation model and today’s current spot price is $78, so upside risk to the inflation forecast there. The other issue was the currency, which they set that to dollar strength. They were quite clear that they saw the recent move in the rand as being driven by global factors, rising US treasury yield, stronger dollar, leading to weaker emerging market currency where South Africa is being negatively impacted.

Lindsay Williams: Did he mention Turkey? Did he mention Argentina? The Turkish lira has been bolstered temporarily in my opinion by interest rate rises there. Was that also brought into the discussion?

Nazmeera Moola: It wasn’t brought into their statement directly by name, so he didn’t mention Turkish or Argentina. What was mentioned in the statement was that emerging market countries with large external vulnerabilities, large external current account deficits have felt the biggest impact of the recent weakness and we know that Turkey has the biggest emerging market current account deficit at this point in time. We also know that Argentina has a huge amount of external liabilities in terms of short-term optional borrowing.

Lindsay Williams: You called the CPI data exactly right. You have called the unchanged policy statement from the South African Reserve Bank exactly right so you have got to get three in a row now. We will only know that in the future. What do you think the next move will be from the South African Reserve Bank? When I say the next move, at the next meeting, unchanged and in the future will it be up or down do you think, given what you know?

Nazmeera Moola: I think the Reserve Bank’s preference at this point in time is to keep interest rates on hold for an extended period of time. So I think that is very much the base case. I think any move will be data-dependent.  So if, for whatever reason, the dollar suddenly collapsed and the oil price went back to $55 and the rand was back to sub $12, then I think a rate cut in July or September comes back into play because I don’t think the South African economy is strong at this point in time. However, that is not our base case expectation at this point.

Lindsay Williams: Nazmeera, thank you very much for your analysis. That’s Nazmeera Moola, Co-Head of Fixed Income at Investec Asset Management in Cape Town. 

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