JOHANNESBURG, May 20 — The South African Reserve Bank (SARB), who rate-setting Monetary Policy Committee (MPC) meets here Thursday, is seen as being caught between a rock and a hard place regarding the upcoming interest rates decision, according to a financial analyst.
George Herman, head of South African portfolios at Citadel Investment Services, says growth in South Africa is under pressure and continuously being marked lower, while inflation is on the rise again and this stagflationary bind makes any one of three policy moves possible, but only one practical, he adds.
The SARB could be bold and follow the example of India and cut the repo rate on Thursday. “This would quickly get some stimulus into the South African economy before it starts the long slog of interest rate increases as the Federal Reserve in the United States starts raising or normalising interest rates from the end of 2015 or at the beginning of 2016,” he explains.
“Reducing rates now will weaken the rand, but bolster economic growth as it supports the average consumer. The weakening Rand will be somewhat inflationary, but will bolster our currently depressed commodity export prices and even help reduce the trade deficit.”
However, if the SARB follows its own advice of the past and looks through the current cycle, 18 months ahead, it will see inflation well above its target range and in anticipation, actually hike interest rates on Thursday, explains Herman.
“This will damage the economy via constrained consumption expenditure, but will throttle off inflation very quickly as the Rand should then strengthen materially. This Rand strengthening will very quickly quell inflation expectations and have the desired effect of getting back within the target range,” says Herman.
“It will be at the cost of increased labour tensions and higher unemployment though, so it’s very unlikely that they’ll follow this path.”
According to Herman, many quarters would consider it prudent if the interest rates were left unchanged on Thursday. “Why move before the Fed and take the risk of being targeted by carry traders or labour unions?,” he asks.
“Inflation will still be within the target range for a few months and monetary conditions are not too loose currently so they could just wait to see how global growth dynamics affect South Africa’s prospects.”