SARB will maintain hawkish stance – even if they pause

By Janice Roberts


There is little consensus in the market on whether SARB Governor Lesetja Kganyago will hike rates on Thursday. Malcolm Charles and Nazmeera Moola from Investec Asset Management’s fixed income team look ahead to the next MPC meeting.

By hiking rates at both the January and March MPC meetings, the South African Reserve Bank (SARB) has made it very clear over the last six months that they remain focused on their primary objective of inflation targeting. However, with growth remaining weak, there is a growing expectation in the market that the SARB may pause at the next meeting on Thursday.

While the market is divided, what we are in no doubt about is that the Governor will maintain a hawkish stance given the upside risks to inflation. Even if he does pause on this occasion, he is likely to emphasise that we remain in a hiking cycle. As with the last meeting, we expect rigorous debate in the committee and a probable repeat of the March meeting, where the members were split on whether to hike or not and the Governor had to use his casting vote.

This Monday’s rand weakness may strengthen the determination of the more hawkish elements of the MPC to raise rates again this week. It highlights the conundrum of the SA MPC at the moment: they are left reacting to the volatility of Chinese and US data and South African political news flow.

So while there is uncertainty around the timing of hikes, the market continues to price in another 50 basis points in rate hikes over the course of the year. In our view this is reasonable considering the inflation outlook.

As a result we remain cautiously defensive in the Investec Diversified Income Fund. We expect markets to remain volatile throughout this year but we recognise that SA assets have repriced and fixed income assets in particular show value and yields look attractive for 2016. As a result we have slightly increased risk from last year on a valuation basis.

Malcolm Charles and Nazmeera Moola are from Investec Asset Management’s fixed income team

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