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

Bank of America Merrill Lynch (BofAML) says it is pencilling in a 25 basis points cut in July, followed by two further cuts in September and then again in January – suggesting a total of 75 basis points within the next six months.

The South African Reserve Bank’s Monetary Policy Committee (MPC) will meet this week, with economists and analysts widely expecting a 25 basis point cut to the prime lending rate.

According to 16 economists polled by Bloomberg, 12 expect a rate cut of 25 basis points to 6.50%, two economists forecast a reduction of 50 basis points, and three expect the bank to keep rates on hold.

The researchers see inflation averaging 4.4% this year, slightly below the SARB’s expectation.

BofAML said that the global backdrop helps emerging market risk and forex. “The market is pricing about 50bp easing in the fed funds rate over the next two meetings, which should offer comfort to the SARB. The SARB MPC is focused on SA fundamentals and the rand, and to a lesser extent the Fed.

“We have revised our growth estimate from 0.9% to 0.5% in 2019. Fiscal risks will constrain the extent of easing,” the financial services firm said.

It said that the rand stands to benefit disproportionately from risk-on in emerging markets. Real 10-year yields based on core inflation are 5%, the highest since 2011 and substantially above many major emerging market peers.

BofAML said that the global backdrop helps the rand while low growth weighs on core inflation. Worsening fiscal would constrain the timing of easing, it stressed.

A Reuters poll of 24 economists in June also pointed to a wide expectation that a rate cut would be coming at the MPC’s next meeting.

Following a hold at the last meeting, Stats SA released GDP data for the first quarter of the year, showing a massive 3.2% contraction – far higher than expectations. Since the release of the GDP data, the Reserve Bank and government have been under pressure to reignite growth.

After the cut, the repo rate is expected to remain at 6.50% until the end of 2021 at least, the economists said, with inflation expected to average 4.5% in 2019 and 5.0% in 2020.

US Federal Reserve Chairman Jerome Powell left it all but certain that the US central bank will reduce interest rates this month for the first time in a decade.

The debate now is how deep they will cut and what will they do afterward. As the July 30-31 meeting nears, forecasts range from JPMorgan Chase & Co. and Citigroup predicting a 25 basis point cut to Morgan Stanley forecasting double that amount.

SARB cares more about local fundamentals than Fed

The rand meanwhile continued to trade on the front foot on Monday against the major currencies:

  • Dollar/Rand: R3.89  (0.48%)
  • Pound/Rand: R17.45  (0.51%)
  • Euro/Rand: R15.67  (0.39%)

Read: Repo rate unchanged as Reserve Bank sees lower growth for South Africa

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