Reserve Bank scenarios

The Reserve Bank concludes what is possibly one of its most important policy meetings today.

Governor Gill Marcus will announce the outcome of the meeting’s deliberations at 3pm from Pretoria.

File photo: Siphiwe Sibeko. Credit: Reuters

The backdrop for the latest policy meeting is the ongoing sharp weakness in the rand.

On Monday it tumbled to a fresh five-year low of R11.25 against the dollar.

The currency slide, which now shows cumulative losses for the rand of more than 20 percent since the start of last year, has serious implications for the South African economy, especially at a time when the country faces mining strikes, high unemployment and rising consumer debt levels.

What follows is an overview of each of the decision scenarios that might be at play in the bank’s thinking.

To cut, hike or hold interest rates steady? That is the question today.

1. No change to repo rate (75 percent probability): Rand expected to be flat to slightly stronger as “no change” repo decision almost fully priced in by markets.

2. 25 basis point cut in repo rate (5 percent probability): A significant surprise, likely to result in market volatility – some rand weakness then some significant strength. Domestic outlook for equities improves, foreigners buy into South African markets, causing the rand to appreciate. The cut is too small to cause sustained currency weakness or a bond sell-off.

3. A 50 basis point hike in repo rate (20 percent probability): Rand weakens sharply on fears that the rate hike will slow economic growth and consumer spending. Foreigners sell off equities, corporates invest less, unemployment rises and stagflation takes place. Administered price increases run in double digits, tax revenues decline and the chance of a credit rating downgrade rises. Confidence levels deteriorate further and economic growth falls toward zero, if not below.

Source: Investec / BR research