Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, explains that the deadlock in the SARB’s MPC has been broken and they hiked the repo rate by 25bps to 6.75%.
Key Quotes
“The decision, however, was not easy as the vote of the six MPC members came in with a 3/3 tie, which points at Governor Lesetja Kganyago’s vote as the decisive one (in case of a tie, the governor’s vote counts twice).”
“There are good and solid reasons supporting both outcomes. To put it in the governor’s words, the decision was a matter of deciding whether to respond to macroeconomic and market current conditions (mostly neutral to dovish and suggesting a hold) or to anticipate the possibility of a future potential shock given the long-term risks to the inflation outlook are already skewed to the upside.”
“That said, the MPC has communicated that the inflation path is now expected by the SARB to be slightly softer than previously forecast. Inflation should peak at 5.6% in Q3 2019 instead of the prior 5.9% in Q2. Also, during the forecasting period, growth in South Africa is still seen as subdued and lacking any substantial demand-driven pressure on CPI.”
“Going forward, we see limited scope for significant further idiosyncratic rand appreciation, net of the general market push for stronger EM FX. As a matter of fact, as we expect Moody’s to change the outlook of South Africa to negative in the near future (the decision may be anticipated by some negative rating action by S&P on Friday, 23 November), we also believe that the USDZAR fair value should be closer to 15 for the time being. By end-2019, we see the pair at 13.96.”
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