SA Reserve Bank
JOHANNESBURG - The appointment of Cyril Ramaphosa as ANC head has brought about a new level of optimism that has manifested itself in positive markets and specifically, the rand/dollar exchange rate. 

The level of the currency is a key driver of inflation and from just under R14/$ at the time of the last MPC meeting, the currency has improved to a level of R12,30/$ today. Should that be sustained or should the currency appreciate even further, that would have a positive influence on headline consumer inflation and the outlook for inflation over the MPC’s forward-looking inflation window (18 months to two years). A more benign inflation outlook would almost certainly lead the MPC to have a more dovish outlook on interest rates.

But what of this meeting?

With the recent introduction of the SARB’s new forecasting model, the governor noted that the model was forecasting a total of 75 basis points of monetary policy tightening up to the end of 2019. The governor was also quite clear that the MPC would not be a slave to the model and could still effect a different outcome if that was deemed a more appropriate action to take.

Nevertheless, the MPC did have a more hawkish tone at the November meeting and was wary of what inflationary impact the currency could have given its weakness at the time. In addition to the rand appreciation since the ANC elective conference, NERSA recently awarded Eskom a 5,23% electricity tariff increase for 2018. That increase was below market expectations and well below the 19,9% that Eskom was requesting.

The upshot of this positive development for inflation is that the MPC, along with most market economists, will very likely adjust their inflation outlook a little lower. The MPC has already indicated that it expects the low point in the current inflation cycle to be experienced in the first quarter of 2018 before the headline inflation rate drifts modestly higher over the remainder of 2018 and 2019. At the meeting this week it’s expected then that with an improved inflation outlook, the MPC can afford to be a little more neutral to dovish on interest rates.

The MPC will almost certainly continue to point to risks to the inflation outlook but given the improved exchange rate and smaller Eskom-tariff increase, those risks should be a little more muted than before. The forward rate agreements (FRAs) in the interest rate markets are pointing to an interest rate cut this year of around 25 basis points but the most likely outcome of this meeting is that the MPC maintains the status quo and keeps the Repo Rate unchanged at 6,75%.

Even with an improved inflation outlook, the MPC will be wary of event risk from both the Moody’s sovereign credit rating pronouncement next month as well as the National Budget to be delivered in late February. Both of these events have the potential to have a marked impact on the currency (positive and negative) and that in turn would necessitate adjustments in the inflation outlook. With the significant uncertainty around these events it’s more likely then that the MPC would prefer to see the outcome of those events before adjusting interest rates.

A lot more positivity has crept into the inflation and interest rate outlook, but it appears a bit too early for the MPC to make any bold moves on the Repo Rate this week.

Craig Pheiffer, Chief Investment Strategist, Absa Stockbrokers & Portfolio Management

The views expressed here are not necessarily those of Independent Media.