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Members of the Monetary Policy Committee of the South African Reserve Bank meet from 15 to 17 January to decide a suitable interest rate stance that sees inflation settle in the middle of the 3% – 6% target range.
The 25 basis points (bps) increase in November last year brought the repo rate and prime lending rates to 6.75% and 10.25%, respectively.
As the first increase since March 2016, the Reserve Bank signalled the beginning of an interest rate hiking cycle that could entail another three increases of 25 bps before end-2020.
While the quarterly projection model, which serves as a policy guideline for the monetary policy committee, suggests three additional interest rate hikes by the end of 2020, PwC believes the Reserve Bank is unlikely to raise interest rates in January.
Here are the top three reasons why the central bank may keep rates stable in its first monetary policy committee meeting of 2019:
1. Global economy fears dampen oil prices and offer petrol price reprieve
On the back of fears about a global slowdown and continuing trade tensions between the United States and China, oil prices retreated for much of the fourth quarter of 2018.
Additionally, record US crude oil production and reports of a sharp increase in US product inventories contribute to a weak outlook for oil prices leading into 2019.
Lower oil prices offered South Africans a welcome reprieve, with the price of inland 95 ULP declining by over R3/litre – from R17.08 to R14.01 between November 2018 and the start of 2019.
Similarly, diesel prices are now almost 20% lower than their peak in November 2018.
As a result, the Reserve Bank may revise down its expectations of Brent crude prices in 2019 and 2020, with the outlook for inflation benefitting from reduced supply-side pressures.
2. US equities jitters may slow down pace of US Fed monetary policy tightening
A 9.3% decline in the S&P 500 stock market index in December 2018 triggered speculation that the US Federal Reserve may slow down the pace of additional monetary policy tightening in 2019, helping emerging markets currencies (including the rand exchange rate).
After continuing on a trend of depreciation for most of 2018, the rand exchange rate is potentially undervalued, according to the Reserve Bank’s November monetary policy committee statement.
With the exchange rate breaking R14 to the dollar early this month, the immediate risk of imported inflation is limited.
3. Economy remains at a crossroads in 2019 – demand pressures weak
Last year’s economic growth results were disappointing, in spite of some recovery in consumer and business confidence.
While the Reserve Bank predicted annual growth of 1.4% at the start of 2018, by November, this expectation was revised down to 0.6%.
South Africa’s economy is expected to bounce back somewhat in 2019 and 2020, facilitated by an anticipated cyclical upswing and improvements in economic sentiment likely helped by recent initiatives like the economic stimulus plan, jobs summit and investment summit.
However, the possibility of fiscal slippage and a lack of structural reforms can weigh on longer-term economic prospects.
Furthermore, renewed concerns around electricity supply and Eskom’s going concern raise the risks to growth, inflation, fiscal outcomes and credit ratings in 2019.
Indications of only a tentative economic recovery in 2019 and 2020 are likely to prevent the Reserve Bank from raising interest rates in January, especially in the absence of additional supply-side pressures that could cause inflation to move closer to the upper end of the target range.
Indeed, the Reserve Bank may also announce a slight moderation this week in the anticipated pace of monetary policy tightening in 2019 and 2020.
Maura Feddersen is a PwC Strategy& economist
