Additional global Covid-19-related stimulus has seen the rand continue to maintain a solid footing, as the South African Reserve Bank (SARB) concludes its policy meeting on Thursday.<\/p>\n
“Locally, we are expecting the SARB to cut interest rates by another 25bps today in an effort to support the ailing economy, while the US will release initial jobless claims this afternoon,” said Bianca Botes, executive director at Peregrine Treasury Solutions.<\/p>\n
Europe\u2019s leaders reached agreement on their coronavirus recovery plan this week.<\/p>\n
The deal allows the European Commission to borrow 750 billion euros and use the proceeds to help struggling economies over the next three years \u2014 allocating 390 billion euros in the form of non-refundable grants, and the rest as loans. Bloomberg reported.<\/p>\n
The package has been widely praised by policy makers and investors for sending a signal on the region\u2019s common resolve and providing a fiscal reinforcement to the ECB\u2019s efforts to shore up growth, it said.<\/p>\n
\u201cAs the worldwide race for a coronavirus vaccine gathers pace and fiscal stimulus uplifts global sentiment, investors seem to be favouring riskier currencies at the expense of the dollar,\u201d FXTM senior analyst Lukman Otunuga said in a note, reported by Reuters.<\/p>\n
The rand traded to a high of R16.35\/$ in the overnight session, and maintained its firm footing in morning trade on Thursday, against the major currencies.<\/p>\n
A sharp fall in the rate of consumer price inflation has defanged what was initially paraded as \u201caggressive\u201d monetary policy action intended to stimulate the floundering economy, said Dr Adrian Saville, chief executive at Cannon Asset Managers.<\/p>\n
“Given a muted inflation outlook, and the depressed economic setting, the question is not if the South Africa\u2019s Reserve Bank\u2019s Monetary Policy Committee (MPC) will cut interest rates this week, but rather by how much?”<\/p>\n
In January, the MPC cut the repo rate by 25 basis points (bps) in response to the domestic economic recession of the second half of 2019, a backdrop of a subdued outlook for consumer price inflation and an anaemic growth forecast.<\/p>\n
Since January, and in direct response to the impact of Covid-19 on the economy and financial markets, the MPC has announced three further interest rate cuts, for a cumulative total of 2.75% this year, Saville pointed out.<\/p>\n
“However, ahead of the last MPC meeting in May, the inflation outlook \u2013 which is the primary consideration in the SARB\u2019s decision framework \u2013 remained subdued and, if anything, faced a risk of falling through the bottom of the 3-6% inflation target.<\/p>\n
“In fact, this risk has since transpired, as South Africa\u2019s inflation rate has fallen to 2.1% in May from 4.5% in January this year. Notably, this 2.1% inflation marks a 15-year low and is also below already-muted expectations.”<\/p>\n
He said that a sharp drop in inflation has essentially mitigated the impact of interest rate cuts, and that consumer price inflation is likely to hug the bottom of the SARB\u2019s 3-6% tunnel to end the year at 3.3%.<\/p>\n
Some analysts are pointing to the possibility of a cut as deep as 50ps (0.5%) on top of the 275bps (2.75%) already seen so far in 2020.<\/p>\n
“However, South Africa\u2019s Forward Rate Agreement (FRA) curve is pricing in 35bps, which can be interpreted as a 100% likelihood of a 25bp cut, and a lower probability of a 50bp cut,” Saville said.<\/p>\n
Additionally, a Reuters\u2019 poll of analysts expects the SARB to cut rates by 25bps to 3.50% from the current 3.75%.<\/p>\n
“Overall then, the SARB is likely to cut 25bp this week, with a very small risk of a 50bp move,” he said.<\/p>\n
Additional key market focal points<\/strong><\/p>\n Alongside the announcement on interest rates, the market is likely to pay careful attention to updates on the SARB\u2019s expectations for economic growth and consumer price inflation.<\/p>\n In the last MPC statement, the SARB noted that gross domestic product (GDP) was expected to contract by 7.0% in 2020, compared to the 6.1% contraction forecast in April.<\/p>\n “Whilst this would represent the deepest economic contraction that we have on record, the SARB\u2019s estimate remains light compared to private sector forecasts that point to a contraction in double-digit territory,” said Saville.<\/p>\n He said that a muted inflation outlook and depressed economic setting means that monetary policy is likely to remain well-anchored for the foreseeable future.<\/p>\n “If anything, the growth-and-inflation cocktail supports further interest rate easing over the second half of 2020, with potentially as much as a further 50bps in easing.”<\/p>\n
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