Unchanged bond rate surprises market
UNCHANGED RATES SURPRISES THE MARKET
The decision by SA Reserve Bank’s Monetary Policy Committee (MPC) to keep interest rates unchanged at 6.75% was unexpected after most economists predicted 25 basis points drop.
“The call was pretty close as three members voted for a cut while three voted for rates to remain unchanged, which meant the chair of the MPC made the final call,” said Ngwenya. “In our view, this was the perfect opportunity for SARB to cut the repo rate as the inflation profile remains subdued; the rand has been relatively stable since their last meeting and household credit growth remained negative in real terms, reflecting weak domestic demand,” she said. Ngwenya said it would be difficult for the SARB to cut rates in November as this would be too close to the ANC elective conference.
In justifying the decision, Bank governor Lesetja Kganyago pointed to a number of factors that he said posed potential risks to the inflation outlook. These included the possibility of higher rates later in the year in the US and UK, which could divert flows from emerging markets, thus weakening the rand, a key driver of inflation.
In a statement following the decision, Sanisha Packirisamy, economist of Momentum Investments, said the investment group had also expected a 25 basis point cut in rates. "Given that the rates remained unchanged on Thursday, Momentum Investments now expected a cut of up to 50 basis points - or two interest rate cuts of 25 basis points each - before the end of the first quarter in 2018."
FNB CEO Jacques Celliers was supportive of SARB’s move. He said that by leaving rates unchanged SARB was “enabling additional stability at a time when many domestic political and policy issues remain unresolved”. “Recent weakness in the rand shows us that events beyond our control can result in unforeseen volatility for consumers,” he said.
Celliers said that following the decision, FNB would maintain its prime lending rate at 10.25%. It will review its position after the next SARB MPC meeting in November.
Since the surprise announcement, the rand was firmer at midday on Friday as the market priced in the increasing unlikelihood of the Reserve Bank raising interest rates at its November meeting. Spurred on by a weaker dollar, the local currency reacted favourably to the Bank’s stance on Thursday to keep the repo rate on hold at 6.75%, against expectations in a split decision among members of the monetary policy committee (MPC).
This could allow the currency to initially forge its way back to the R13.08 to R13.12 to the dollar area, analysts at Momentum SP Reid said.