Herewith the latest edition of the Monthly Insights. We trust that this will contribute to a broad overview of the interest rate, currency and financial markets.

Executive Summary

  • In an unexpected move, the SARB cut the repo rate in July by 25bps to 6.75%, with the prime rate at 10.25%. Four members voted for a cut, and two members voted for unchanged rates (this after leaving rates unchanged at the previous seven policy meetings). The decision was based on better-than-expected inflation outcomes, a remarkably resilient rand and a much-improved inflation outlook set against the background of a weak economy with further downside risks. Assuming that these trends persist, we have adjusted our interest rate forecast to include another two to three cuts of 25bps each by 1H18, followed by a flat profile into 2019.
  • We do believe that the current monetary policy loosening cycle will be very shallow (and possibly short-lived), unlike the previous hiking cycle which lasted for three years and culminated into 200bps of hikes. We expect a shallow cycle due to the risks to the inflation outlook in the outer years of the forecast period which remain to the upside because of food prices and a vulnerable rand exchange rate, possible above-inflation electricity tariff hikes, charging VAT on the fuel price and the wearing-off of the low base effects.
  • The statistics available so far for the second quarter suggest that the economy fared marginally better. In April and May of 2017, both mining and manufacturing managed to increase output on a seasonally adjusted basis compared with the first quarter. Retail sales also increased from very weak levels, but total new vehicles sales were sharply down from the first quarter. Our growth forecast remains unchanged at 0.6% for 2017, 1.3% for 2018 and 1.9% for 2019, but downside risks have increased. In July, the Reserve Bank also revised its growth forecast for 2017, 2018 and 2019 down to 0.5%, 1.2% and 1.5% respectively (from 1%, 1.5% and 1.7% previously).
  • The outlook for the rand remains uncertain. The rand remains vulnerable to any resurgence in risk aversion from global investors, which could be triggered by a faster-than-expected rise in US interest rates, more significant reductions to global liquidity than currently anticipated, disappointing economic news out of China, or lower commodity prices. The rand could also be hurt if there are further domestic political or policy shocks as well as downgrades to the country’s rand-denominated credit ratings.