Anthea Gardner, Managing Partner at Cartesian Capital
As was widely expected, the South African Reserve Bank’s Monetary Policy Committee (MPC) kept rates on hold yesterday.
Immediately after the MPC meeting, the equity market fell by a third of a percent, the Rand weakened from R18.18 to R18.22 and government bonds fell by 0.15%.
But more importantly, every market analyst would have been listening carefully to the governor’s words; because, besides the fact that “Words Matter”, we want to know when to expect lower debt repayments. It’s been a tough 2 years for consumers as the Repo rate, which informs bank borrowing rates, has more than doubled from 3.5% to 8.25% (a 15 year high).
If you had a R1m mortgage at Prime + 2% (9% p.a.) in November 2021, your mortgage increased from approx R9,000 per month to R12,250 per month (13.75% pa). So, of course, everyone is looking for the rate cutting cycle to start.
Market participants, as measured by the Forward Rate Agreement (FRA) curve, are expecting a 0.25% rate cut at the next MPC meeting in September, with a 60% chance of a 0.50% cut. At Cartesian we are worried that the CPI Inflation rate is still at 5.2% and we are not convinced it would reach the 4.5% target by September. Kganyago has often reiterated that high inflation has a more pronounced negative impact on the poor (bearing in mind that more than half the South African population lives below the upper-bound poverty line and a quarter of our population experience food poverty).
It hasn’t gone unnoticed that the MPC has been criticised for the high Repo rate because high interest rates do not bode well for economic growth – think about companies that need to borrow money to grow, now at higher interest rates, and consumers who have less money to spend because their monthly debt repayments (house, car, shop cards) leave little extra for discretionary spending. Did you know that 67% of economic growth is driven by consumer spending in South Africa? Heaven knows, we desperately need economic growth, but that is not the MPC’s mandate.
Based on where the currency is currently trading and the MPC’s forecasts, they project that inflation will imminently anchor closer to 4.5%; but the balance of risk remains to the upside and future decisions will continue to be data dependent.
Some light at the end of the tunnel is that four of the six MPC members voted to keep rates unchanged and two voted for a cut, even though we have not reached the 4.5% inflation target yet; and our team got the sense that the governor was a bit more dovish this time around.
There is also a lot of talk in the market about a Trump presidency being re-inflationary, and this could throw a spanner in the works, but the governor did mention that interest rates are currently restrictive, and I interpret that as meaning that we do not have to raise interest rates in order to reach the target inflation rate, but simply keep the rate at this level for longer.
It’s a tough economic environment for South Africans, vasbyt a bit longer.
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