Executive Summary

·        Our Interest Rate Barometer considers the factors influencing the decision of the SARB Monetary Policy Committee’s last meeting on 18 January 2018, as well as developments since the last meeting (which, in our view, could influence the MPC rate decision on 28 March 2017). The factors are rated on a stand-alone basis as a likely hike, hold, or cut and are weighted into three broad categories: Global economy (20%), domestic economy (40%), and major inflation drivers (40%).

·        Of the 13 factors analysed, six support an unchanged stance, one factor favours a hike, while six factors support a cut. On a weighted basis, this implies a split probability of a 47% chance of a hold and a 47% chance of a cut at this week’s MPC meeting; we believe that it will be a very close call between these two options.

·        Based on our analysis, we are of the opinion that the repo rate will be reduced by 25bps this week. However, before Friday’s rating action we thought a cut was more likely in May rather than at this week’s MPC meeting. The “Stable” outlook assigned to South Africa’s rating by Moody’s now favours a first rate cut this week in our opinion. We maintain our base case (unchanged since the start of the year) that two cuts of 25 bps each are likely to materialise this year*. The SARB has maintained an inflation profile above consensus and we could now see marginal downward revisions to the SARB’s inflation forecasts, while we expect its growth forecasts to be revised higher.

·        Given the elimination of credit rating downgrade risks, the threat of imminent WGBI-related outflows has diminished in our opinion. As a result, the SARB could credibly adjust the Quarterly Projection Model (QPM) to reflect a flat interest rate path, as opposed to the hikes that were projected in January 2018. Given the elimination of significant upside risks that the SARB had previously been concerned about (particularly the rand), we see the risks to the inflation outlook as balanced over the medium-term.