MPC drops rate by 25bp

16 January 2020

The MPC committee unanimously elected to cut the repo rate by 25bp to 6.25%, with a continued moderation in inflation expectations

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MPC update graph
The MPC committee unanimously elected to cut the repo rate by 25bp to 6.25%, with a continued moderation in inflation expectations and an “improved risk profile,” opening up “some space to provide further policy accommodation to the economy.”   
 
Indeed, recent monthly inflation readings have been subdued, notably below the mid-point of the inflation target range, with November’s CPI inflation reading at just 3.6% y/y. Expectations are for the inflation rate to remain firmly anchored within the target range in the medium term, with the SARB’s Quarterly Projection Model’s (QPM) headline inflation projections notably below November’s figures.
 
Overall risks to the inflation outlook are deemed balanced. Demand side pressures remain muted, while “house rental prices are expected to increase at only moderate rates.” Additionally, the food price component, which comprises a large chunk of the CPI basket “continues to surprise to the downside on a monthly basis” and has been revised from 5.8% to 4.7% for 2020. 
 
Upside risks to the inflation trajectory however remain, including administered price increases and nominal wage growth. Additionally, while the rand has appreciated modestly since the last MPC meeting, “the risk remains that domestic shocks generate more capital flow volatility and put pressure on the exchange rate and inflation.”  
 
The domestic growth outlook remains sluggish, and while Q4.19 GDP growth is projected to have edged up modestly, “electricity supply constraints will likely keep economic activity muted in the near term.” Consequently, expectations for domestic growth have been revised lower to 0.4% y/y (previously 0.5% y/y) for 2019 and to 1.2% y/y (from 1.4% y/y) and 1.6% y/y (from 1.7% y/y) for 2020 and 2021 respectively, with risks to the growth forecast evaluated to be to the downside, according to the SARB.  
 
The SARB’s Quarterly Projection Model signaled “two repo rate cuts of 25 basis points each in the first and fourth quarters of 2020.” However, this is a “broad policy guide which could change in either direction from meeting to meeting,” according to the SARB, “in response to new developments and changing data and risks.”

Read the full report

 

PREVIOUS ECONOMIC UPDATES:

 
Retail outlook image
 
15 January 2020

 

Retail Outlook: Retail trade sales rose in November, boosted by Black Friday

 

Retail trade sales accelerated to 2.6% y/y in November, following September’s marginal 0.4% y/y lift, with the result notably above market expectations (Bloomberg) of 0.7% y/y.

Retail outlook graph
The Black Friday retail frenzy, was primarily responsible for the uptick, with BankservAfrica (SA’s largest automated payments clearing house) reporting a 36% y/y increase in their total number of Black Friday transactions processed (in-store and online).       
 
An analysis of the retail sales performance in November suggests that the lift in the headline outcome was broad based, with six of the seven sub-categories contributing to the result. The largest positive contribution stemmed from the general dealers category, which with its bulky 42.2% weighting in the retail basket added 1.3% to the top line number, on the back of growth of 3.2% y/y.  
 
Retail price inflation however remains notably below CPI inflation, continuing to reflect the subdued nature of the domestic economy, where retailers are compelled to compress margins in the face of lackluster demand. 
 
That is, November’s performance aside, the BER’s latest retail survey (Q4.19) “(p)aints a picture of a retail sector that remains under pressure”. Lackluster confidence, exacerbated by elevated uncertainty around the country’s electricity supply, coupled with muted household credit growth, a weak labour market and elevated debt levels continue to impede the consumer’s ability and willingness to spend.  
 
As such, any significant and sustained pick-up in household consumption expenditure in the near-term is unlikely.

Read the full report

You may also be interested in the following updates in January

  • Rand note: 13 January

    Rand Note: Volatility persists ahead of material risks for SA in 2020
  • Electricity update: 7 January

    Electricity update: The fall in electricity production deepens

You may also be interested in the following updates in January

Rand note: 13 January
Electricity update: 7 January

Rand Note: Volatility persists ahead of material risks for SA in 2020

Electricity update: The fall in electricity production deepens

Rand note
 
6 January 2020

 

Rand Note: Rand pierces R14.00/USD mark during festive period

 

The rand strengthened in the last few days of 2019, before depreciating as the US kills Iran’s top military leader. SA economic growth realities, as load shedding is reinstituted, also sour rand sentiment 

The rand strengthened to R13.96/USD, R15.58/EUR and R18.27/GBP in the last few days of 2019, buoyed by the typical strengthening trajectory this time of year, until the unexpected shock of the US’s killing of General Qassem Soleimani. Resultant risk-off saw the domestic currency weaken to R14.37/USD, R16.00/EUR and R18.79/GBP.

The US ordered military strike, which resulted in the death of the Iranian General, saw Iran cancel its 2015 nuclear deal agreement, with both the US and Iran threatening very severe attacks going forward, causing tensions in other countries in the Middle East to flare, with risk of war harming sentiment in global financial markets .  

Oil prices rose on fears of tightening supply as retaliatory attacks are feared on oil pipelines, shipping in the Strait of Hormuz and/or the Red Sea, as well as on cyber and American targets. The WTI (West Texas Intermediate) oil price has risen to around US$64/bbl, and the Brent crude oil price to close to US$70/bbl.

The WTI crude oil price has run closer to US$55/bbl in 2019, with a high number of US shale oil producers indicating breakeven above the US$55/bbl mark for WTI crude. Indeed, even with the WTI crude price closer to US$57/bbl in Q4.19, US drilling activity contracted, with a negative impact also on firms in related services industries.

A number of US firms in the industry were reported to be expected to cut capital expenditure this year, with weak oil prices and high costs cited, and some worries also around solvency and bankruptcy. However, this generally depressed sentiment of US shale oil producers was recorded prior to the jump in oil prices following the death of Iran’s General.

With the US-led global trade war expected to see a  first phase deal signed between the US and China mid-January, the rand had been gaining fairly steadily since October to the end of 2019, before it weakness in January. Today, the rand has pulled back somewhat, to R14.22/USD, R15.92/EUR and R18.67/GBP, from its weak levels on Friday.

Rand volatility tends to be lower in the first quarter of the calendar year, as neutral to risk-on sentiment tends to prevail during the Northern Hemisphere winter as traders are typically more active, and larger risk takers than during the Northern Hemisphere summer months of vacation, resulting in some seasonality for the rand and other EM currencies.

This seasonality may be aiding a less subdued response to the US-Iran military conflict (absent further escalation). The global seasonal effects for EM currencies often see the search for yield shrug off bad news, more quickly than the more risk averse, and often thinner, trading months in the middle two quarters of the year.

Eskom’s reinstitution of load shedding likely also weakened the domestic currency in January. Indeed, Eskom warns that insufficient electricity supply could persist for two years, which is clearly negative for South Africa’s GDP growth and so for market sentiment on the rand.

Read the full report

You may also be interested in the following updates

  • Rand note: 25 November

    Rand reaches the Q4.19 forecast, shrugging off S&P’s negative outlook
  • Rand note: 18 November

    Rand nears our Q4.19 forecast gaining from improved market sentiment
  • Rand note: 14 November

    Rand strengthens somewhat over the course of this week
  • Rand note: 4 November

    Rand strengthens on relief SA did not see a credit rating downgrade
  • Rand note: 28 October

    Rand runs stronger ahead of the expected FOMC 25bp cut this week
  • Rand note: 7 October

    The currency fell prey, again, after pulling back towards R15.00/USD
  • Rand note: 30 September

    The domestic currency settles above R15.00/USD
  • Rand note: 23 September

    Rand runs back towards R15.00/USD

You may also be interested in the following updates

Rand note: 25 November
Rand note: 18 November
Rand note: 14 November
Rand note: 4 November
Rand note: 28 October
Rand note: 7 October
Rand note: 30 September
Rand note: 23 September

Rand reaches the Q4.19 forecast, shrugging off S&P’s negative outlook

Rand nears our Q4.19 forecast gaining from improved market sentiment

Rand strengthens somewhat over the course of this week

Rand strengthens on relief SA did not see a credit rating downgrade

Rand runs stronger ahead of the expected FOMC 25bp cut this week

The currency fell prey, again, after pulling back towards R15.00/USD

The domestic currency settles above R15.00/USD

Rand runs back towards R15.00/USD

Rand note
 
27 August 2019

 

Rand outlook: Elevated risk aversion in global markets causes marked rand sell-off

 

The rand sell-off in what is typically a risk off period for the domestic currency. The fourth quarter of the calendar year tends, in contrast, to see the rand recover.

The rand has weakened materially this month, to R15.50/USD, R17.19/EUR and R18.81/GBP fromR13.81/USD, R15.42/EUR and R17.15/GBP earlier in the quarter. Renewed fears of global recession initially saw a material sell-off of EM currencies, reinforced by market concerns over a perceived insufficiently dovish tone from the Fed following its July FOMC meeting.
 
The US economy is evincing strong economic growth, running at full employment, and leading to Fed caution on the monetary easing front. The FOMC was clear that the 25bp cut in interest rates at its July meeting did not necessarily indicate the start of a lengthy interest rate cut cycle, but more recently, commentary from Jackson Hole seems less opposed to additional easing.
 
Rand weakness ensued in August on the back of the Fed commentary after its July meeting, alongside worsening policy uncertainty in SA, delayed growth-enhancing reforms, fears of the need for an IMF bailout and the lack of resolution to the Eskom debt crisis.
 
Despite the IMF subsequently denying that SA needed financial rescue, the rand failed to strengthen, dragged down most recently by further trade developments at the past weekend. The domestic currency has been running towards the down side in August, as indicated by an earlier increase in the probability of the risks to the down side already in July, leading to a revision now of the H2.19 expected case currency forecasts.

Read the full report

You may also be interested in the following updates in August

  • Oil note

    Fears of slower global growth lowers oil prices
  • Rand Note

    Rand stabilises as US economic symposium, Jackson Hole, approaches (19 Aug 2019)
  • Mining Update

    Based on June’s reading, mining production is expected to make a positive contribution to Q2.19 GDP (8 August 2019)
  • Rand Note

    Rand weakens as heightened global trade tensions add to the downside (06 August 2019)
  • Vehicle Sales Update

    Sales of new vehicles fell by 3.7% y/y in July, underpinned by a marked declined in the passenger car segment (1 August 2019)
  • PMI Update

    The increase in the manufacturing PMI to back above the neutral 50-mark may prove unsustainable in the coming months (1 August 2019)
  • Electricity Update

    Consumption figures continued to contract in June and remain constrained by weak domestic activity (1 Aug 2019)

You may also be interested in the following updates in August

Oil note
Rand Note
Mining Update
Rand Note
Vehicle Sales Update
PMI Update
Electricity Update

Fears of slower global growth lowers oil prices

Rand stabilises as US economic symposium, Jackson Hole, approaches (19 Aug 2019)

Based on June’s reading, mining production is expected to make a positive contribution to Q2.19 GDP (8 August 2019)

Rand weakens as heightened global trade tensions add to the downside (06 August 2019)

Sales of new vehicles fell by 3.7% y/y in July, underpinned by a marked declined in the passenger car segment (1 August 2019)

The increase in the manufacturing PMI to back above the neutral 50-mark may prove unsustainable in the coming months (1 August 2019)

Consumption figures continued to contract in June and remain constrained by weak domestic activity (1 Aug 2019)

Rand note
 
12 August 2019
 

Rand outlook: Elevated risk aversion in global markets causes marked rand sell-off

 

The rand sell-off in what is typically a risk off period for the domestic currency. The fourth quarter of the calendar year tends, in contrast, to see the rand recover.

The rand has seen a further marked sell-off at the start of this week, depreciating to R15.46/USD, R17.28/EUR and R18.66/GBP from R13.98/USD, R15.77/EUR and R17.59/GBP a month ago. Risk aversion in global financial markets has elevated, leading to EM currency sell-off.

Financial market players’ concerns over global economic growth have sparked the latest sell-off (see “Rand note: Rand weakens as heightened global trade tensions add to the downside”, 6th August 2019, see website address below), a sell-off exacerbated by the inherent risk aversion of the northern hemisphere summer period.

Typically global financial markets experience a sell in May-and-go-away phenomenon, namely the northern hemisphere summer vacation effect which tends to result in an exodus from riskier assets as many market players take time off, and are mostly out of the markets away on holiday. 

The dovish FOMC tone in the first half of the year, and even most of July, countered most of the May-and-go-away phenomenon this year, as a series of US interest rate cuts were expected, and as such, were seen to provide protection against the weakness in global economic growth. 

However, at the end of July FOMC commentary did not deliver the very dovish tone that markets were expecting, and financial markets consequently reduced expectations of further US interest rate cuts this year, cuts that were seen to be needed to stave off market concerns over economic growth (see “FOMC note”, 1st August 2019).

July’s US interest rate cut itself was deemed insufficient in the face of the risks for economic activity emanating from the escalation in trade tensions, which, combined with weak data from other key areas such as the Eurozone and China, has also exacerbated the risk-off environment.

Market players are now particularly concerned that, in the absence of further US interest rate cuts this year, aggressive US-led trade protectionism will see US, and indeed global, economic growth slow markedly, typically negative for equities, and other perceived risky assets, such as EM assets.

Read the full report

FOMC note
 
01 August 2019
 

FOMC note: The US Federal Open Market Committee cuts by 25bp as expected

 

Rand fails to strengthen as national treasury announces an increase in bond issuance per week in SA to support Eskom bailout, Moody’s downgrade becomes more likely for South Africa.

The US Federal Open Market “Committee … (FOMC) … decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent” as expected at its July 2019 meeting. Two committee members voted against the cut, preferring that the fed funds target rate was left unchanged instead. 
 
Specifically, the FOMC worried that “although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent.” 
 
The FOMC in particular highlighted global growth concerns in its decision to cut interest rates, stating “in light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate.” 
 
The rand had already priced in this 25bp US rate cut aleady in July (see “Bond note: rising expectations of a 25bp cut at the July FOMC meeting sees the rand drop through R14.00/USD, and the yield on the R186 through 8.00%, with the US yield curve maintaining inversion over the 10 year - 3 month period since May”, 11th July 2019, website address below). 
 
Severe financial deterioration of South Africa’s electricity utility, Eskom, has added to the pressure on SA’s government finances. SA’s Finance Ministry recently detailed a special appropriation bill for an additional R59bn for Eskom over two years, which will widen the budget deficit, with National Treasury announcing additional weekly bond issuance of around 27%. 
 
Moody’s immediately responded that SA’s “Government proposal to more than double support to Eskom is credit negative”. Moody’s is the last of the three key credit rating agencies to hold SA long-term debt on investment grade, Fitch also responded immediately, dropping SA rating outlook to negative, indicating that a credit rating downgrade is on the cards.

Read the full report

You may also be interested in the following updates in July

  • Government Finance Update

    Weak economic activity slows growth in tax collections in June (31 July 2019)
  • PSCE Update

    Private sector credit extension moderated in June on slower corporate credit growth (29 July 2019)
  • PPI Update

    Producer price inflation eased to 5.8% y/y in June, underpinned primarily by a moderation in fuel price inflation (25 July 2019)
  • CPI Update

    Rate of CPI inflation remained unchanged at 4.5% y/y in June (24 July 2019)
  • Tourism Update

    Tourist numbers down 1.4% year-on-year, between January and May 2019. (22 July 2019)
  • Labour Update

    Unemployment climbs to 29.0% in Q2.19, against a backdrop of very weak growth (30 July 2019)
  • Trade Update

    Trade balance surplus widens to R4.42bn in June (31 July 2019)

You may also be interested in the following updates in July

Government Finance Update
PSCE Update
PPI Update
CPI Update
Tourism Update
Labour Update
Trade Update

Weak economic activity slows growth in tax collections in June (31 July 2019)

Private sector credit extension moderated in June on slower corporate credit growth (29 July 2019)

Producer price inflation eased to 5.8% y/y in June, underpinned primarily by a moderation in fuel price inflation (25 July 2019)

Rate of CPI inflation remained unchanged at 4.5% y/y in June (24 July 2019)

Tourist numbers down 1.4% year-on-year, between January and May 2019. (22 July 2019)

Unemployment climbs to 29.0% in Q2.19, against a backdrop of very weak growth (30 July 2019)

Trade balance surplus widens to R4.42bn in June (31 July 2019)

Rand update
 
29 July 2019
 

Rand note: Rand runs back through R14.00/USD

 

South Africa is seen to move closer to becoming a sub-investment grade country, as rated by all three of the key credit rating agencies - the probability of the lite down case increases

After reaching R13.86/USD, R15.62/EUR and R17.40/GBP last week, the rand has run back above R14.00/USD, and closer to R16.00/EUR and R18.00/GBP, as Finance Minister Mboweni proposed further support for Eskom. Fears have arisen of further tax hikes in an environment where growth has dropped towards zero in a decade of rising direct and indirect taxation.

Two credit rating agencies indicated further credit rating downgrades could be on the cards for SA, with Moody’s specifically highlighting that “the Government proposal to more than double support to Eskom is credit negative” – Moody’s is the last of the three key credit rating agencies to hold SA long-term debt on investment grade. 

Prior to SA’s government comments on Eskom, the rand had convincingly strengthened past the R14.00/USD key resistance level on financial market expectations that the US will cut its interest rates this year by 50bp, with a 25bp cut expected to occur as early as this week.

However, the special appropriation bill from the Finance Ministry, detailing an additional R59bn for Eskom over two years, was met with a negative reaction from the rand as both Moody’s and Fitch signalled it increased the risk of further downgrades, with Moody’s specifying “(i)f passed, the additional support  … (to Eskom)… would be an additional drain on fiscal resources.” 

In particular, Moody’s worries that “South Africa's sluggish growth outlook limits its ability to absorb the extra cost of Eskom support”, and that “(n)o clear strategic turnaround plan agreeable to all stakeholders has emerged yet, fuelling risks for the government of having to provide additional support”.

We have revised our probability of the lite down case to 35% from 25% as the likelihood of SA receiving a credit rating downgrade from Moody’s is increasing, with the probability of the expected case falling to 45% from 50%, and that of the severe down case falling to 9% from 14% as the FOMC becomes increasingly dovish, and global growth risks reduce.

Read the full report

You may also be interested in the following updates in July

  • MPC update

    MPC update: The SARB unanimously opts to cut the repo rate by 25bp in July (19 July 2019)
  • Building Update

    Building plan approvals are down 8.9% y/y for the year to date (to May), with insufficient demand a major constraint (18 July 2019)
  • Retail Sales Update

    Retail trade sales grew by 2.2% y/y in May, buoyed by the general dealers' category (17 July 2019)
  • Manufacturing Update

    Production lifts by a modest 1.0% y/y in May, supported chiefly by a pick-up in the food and beverage division (11 July 2019)
  • Mining update

    Mining production fell by 1.5% y/y in May. Dragged down by marked declines in gold and diamond production (11 July 2019)
  • Government Finance update

    Budget deficit increases in the first two months of the 2019/20 fiscal year (8 July 2019)
  • Rand update

    Rand flirts with R14.00/USD, but piercing this resistance level will prove hard (3 July 2019)
  • Electricity Production Update

    Production and consumption figures contract in May and continue to be constrained by muted domestic activity (4 July 2019)
  • HCE outlook

    Domestic demand remains muted, underpinned by a highly constrained consumer (3 July 2019)
  • Vehicle Sales update

    Passenger car sales contracts by 3.2% y/y in June as consumers remain financially constrained (1 July 2019)
  • PMI update

    PMI signals that the manufacturing sector remained in contraction in Q2.19 (1 July 2019)

You may also be interested in the following updates in July

MPC update
Building Update
Retail Sales Update
Manufacturing Update
Mining update
Government Finance update
Rand update
Electricity Production Update
HCE outlook
Vehicle Sales update
PMI update

MPC update: The SARB unanimously opts to cut the repo rate by 25bp in July (19 July 2019)

Building plan approvals are down 8.9% y/y for the year to date (to May), with insufficient demand a major constraint (18 July 2019)

Retail trade sales grew by 2.2% y/y in May, buoyed by the general dealers' category (17 July 2019)

Production lifts by a modest 1.0% y/y in May, supported chiefly by a pick-up in the food and beverage division (11 July 2019)

Mining production fell by 1.5% y/y in May. Dragged down by marked declines in gold and diamond production (11 July 2019)

Budget deficit increases in the first two months of the 2019/20 fiscal year (8 July 2019)

Rand flirts with R14.00/USD, but piercing this resistance level will prove hard (3 July 2019)

Production and consumption figures contract in May and continue to be constrained by muted domestic activity (4 July 2019)

Domestic demand remains muted, underpinned by a highly constrained consumer (3 July 2019)

Passenger car sales contracts by 3.2% y/y in June as consumers remain financially constrained (1 July 2019)

PMI signals that the manufacturing sector remained in contraction in Q2.19 (1 July 2019)

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