By: Reza Hendrickse, Portfolio Manager at PPS Investments.
The Monetary Policy Committee (MPC) once again voted to keep rates on hold this month, having last cut rates in July. The Committee was split three to two in favour of staying on hold, despite inflation having steadily surprised on the downside in recent months, arguably having provided ample scope for a cut.
Some might view the decision as overly cautious, particularly given the prevailing low growth backdrop, which has contributed to disinflationary pressures. The decision to remain on hold though, was predominantly driven by the view that the MPC would like to see inflation expectations moderate further to the midpoint of the target band. The Quarterly Projection Model (QPM) predicts a rate cut of 25 basis points in the third quarter of 2020, but this is viewed as data dependent.
The MPC’s reluctance to cut rates remains in contrast to US policy, which has seen three rate cuts so far this year. Muddying the waters slightly, is the growing possibility of a negative Moody’s credit rating announcement next year, which the committee probably has had to start factoring into their decision-making.
The potential negative effect on inflation that a downgrade might have via a weaker currency, is likely to be in the back of the committees’ mind as something to pre-emptively manage.
Looking ahead, should inflation continue to surprise on the downside going forward, it would provide decisive room for lower rates locally, without negatively affecting SA’s relatively attractive real interest rate level compared to the rest of the world, which the MPC has sought to preserve.