South African interest rates may fall, and not due to politics

 ·17 Jul 2019

Should Lesetja Kganyago announce a cut in South African interest rates this week, as expected, it won’t be because the nation’s politicians want him to.

The biggest economic contraction in a decade has led to renewed calls from labor unions and some officials in the ruling party for an expansion of the Reserve Bank’s mandate to include economic growth and job creation, and for a cut in its key interest rate to help boost output.

The governor of the Reserve Bank has become a global voice for central bank independence and has rejected suggestions the central bank would bow to pressure.

But cooling inflation may let him appease some of those critics this week, with a sound policy argument.

All but four of the 22 economists in a Bloomberg survey predict the Monetary Policy Committee will cut the benchmark rate on Thursday. That will be the first easing since March 2018.

Forward-rate agreements starting in a month foresee an 80% chance of a quarter-point reduction to 6.5%.

The latest available data indicates the economy remains weak after a 3.2% annualized decline in the first quarter, while inflation has come in below the central bank’s forecasts, and sits in the middle of the target band of 3% to 6%.

The rand’s 4% gain against the dollar since the last decision in May also offers room to loosen policy, according to Abri du Plessis, an economist at Gryphon Asset Management Ltd.

“I don’t think he will play hardball just to show the politicians that he won’t cut,” Du Plessis said by phone.

“He cares little enough about that that he would be able to say the economic data shows we must cut, whether it’s in line with the political pressure or not.”

The global trend is for lower rates. Amid slowing growth, the US Federal Reserve, European Central Bank and perhaps even the Bank of Japan are all set to ease monetary policy.

Central banks across emerging markets have already shifted gears this year, with Russia, Chile, Malaysia, India and the Philippines lowering rates in recent months.

Vote of Confidence

While the ruling African National Congress’ secretary-general Ace Magashule said in June the party will press to expand the Reserve Bank’s mandate, Kganyago’s policy stance has the backing of Finance Minister Tito Mboweni and president Cyril Ramaphosa.

That’s unlike in the US where president Donald Trump is publicly calling for Federal Reserve Chairman Jerome Powell to lower rates.

The president last week reappointed Kganyago for a second five-year term and named two existing MPC member as his new deputies. That’s a vote of confidence in the central bank’s policy stance, according to Frank Blackmore, an economist at EF Consult.

Read: SARB to begin easing in July – could we see 3 rate cuts before January?

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