Why we’re getting another rate cut – despite the obvious risks
South Africa can expect at least one more rate cut before the end of 2017, but not everyone is on board with the plan, given the risks that are still very clearly in view.
That’s according to research analyst at Nomura, Peter Attard Montalto, who believes that there’s a minor tussle between the risk-hungry ‘doves’ (members of the Reserve Bank’s Monetary Policy Committee who are more optimistic about South Africa) and the ‘hawks’ (the MPC members who are more risk-averse).
According to Attard Montalto, while a rate cut of around 25 basis points is widely expected – even by Nomura – the underlying questions is: why?
“The last cut can be explained in nominal terms by the reduction in long-term inflation forecasts,” the analyst said; going much further would imply changes to risk factors and real underlying rates that are simply not there.
“The doves seem to have grown tired of waiting for risk events – while the hawks are still willing to be patient,” he said. “However, the doves are in the majority.”
The actual reasons for cutting are marginal, he said, as most of South Africa’s weak growth is structural and a given, considering the risks on the horizon – ratings downgrades, political and policy uncertainty, etc.
“At best it looks like an attempt (by the doves) to do what little they can to support growth, when they can, in a minimal way,” Attard Montalto said.
The analyst said that there were a number of factors in play in South Africa that could be opening the way for the doves to vote in favour of rate cuts; specifically:
- The markets are benign, with Fed hikes in the US not offering a significant threat to SA markets at the moment. However, Nomura believes that the doves are underplaying the risks involved.
- Ratings downgrades are priced into the market – even though the threat of being kicked out of the World Government Bond Index still lingers.
- Inflation is broadly ‘under control’, which allows the MPC to consider growth more actively.
- Even though the impact of rate cuts will be small, it’s better than doing nothing at all.
The MPC is set to meet on Thursday, 21 September, and Nomura anticipates a cut of 25 basis points from a vote split 4-2 in favour. Reserve Bank governor, Lesetja Kganyago is seen as one of the hawks in the matter.
“At the end of the day it comes down to risk aversion or not. The doves are more risk-loving in terms of monetary policy action than we think could be justified in future looking back,” the group said.
Contrary to other analysts who expect yet another rate cut in November, Nomura believes that rates will be held until next year, pending the outcome of the ANC’s elective conference.
If a ‘reform’ candidate is elected as the party’s president, the group sees a 12 to 18 month ratings reprieve, allowing another 50 basis points of rate cuts to play out.
Read: South Africa could see 2 more rate cuts before the end of the year
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