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13 June 2019

Politics may delay rate cut

  • In the last six months, four emerging markets have cut rates. India eased by a cumulative 75 bps; Chile, the Philippines and Malaysia eased by 25 bps, citing growth concerns and the need for stimulus. This stance is pro-growth, and keeps inflation contained.
  • Developed markets too are concerned about growth, with the Fed having turned more dovish; the ECB committing to unchanged rates at already low levels until at least mid-2020, and the Bank of Australia recently cutting rates to support growth.
  • The SARB too has growth concerns; at the bank’s MPC meeting in May, two out of three members voted for a 25 bps cut. However, the SARB’s ongoing reticence in easing has to do with the highly volatile rand and its negative impact on both inflation and inflation expectations, which the bank wishes to anchor at 4.5%.
  • The recently resurgent political pressure on the SARB might see it remain on hold for credibility and independence reasons, despite the now pressing reasons for a cut.
  • We however believe that the bank will keep looking to the data, likely easing rates in Q3, but only if a viable turnaround plan for Eskom materialises. This would be positive for growth as well as SA financial assets such as the rand.

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