Market Outlook

Last week’s Monetary Policy Committee Meeting saw interest rates hiked by 25 basis points. While expected, in our view, this rate hike was a mistake.

Here are ten reasons why:

  • The yield on nominal bonds went down as a result of this action. The interest rate market, as a whole, is saying rates are too high.
  • The Rand is weak because of low / negative growth. Hiking rates attacks the symptom and exacerbates the cause.
  • Shoprite talks about 11 500 line items on its shelves which are cheaper than a year ago. Much of the demand / consumer-driven portion of the economy is very weak and is actually in deflation.
  • The inflation is being driven by cost push inflation from an inefficient state. No amount of rate hikes is going to make Eskom an efficient power producer.
  • Eskom is battling to recover costs due to stagnant / declining electricity sales. This hike will further reduce volumes for Eskom, resulting in even greater requests to NERSA for tariff increases in future. The rate hike was self-defeating.
  • The oil price has come down by 25% since the last Monetary Policy Committee Meeting. This, in itself, will reduce headline inflation pressure going forward, with petrol due to come down by R1.50 per liter next month.
  • The Rand has strengthened since the last MPC meeting, again reducing inflation expectations going forward.
  • The US economy is cooling off significantly. This will slow the pace of hikes going forward. The risk from rapid global monetary policy tightening is in the rear-view mirror, not in front of us.
  • The normalized US economic growth rates should lead to some normalization of the US Dollar from its overly strong position today. The risk is slightly skewed towards a stronger Rand in future.
  • South Africa has just hiked rates, while Stats SA says we are in a recession. This was not wise.

Every cloud has a silver lining. In this case, those who are saving stand to benefit from higher returns on their fixed income investments. Whilst we do not agree with the hike, we do understand that this will dampen the possible need for future hikes bringing long-term stability to our monetary policy.

The South African Reserve Bank has emphatically demonstrated its independence to the IMF and rating agencies. In the long run, this independence is more important to South Africans than what is actually a relatively small increase in the cost of debt.

Written exclusively for Moore Stephens by Nolan Wapenaar, joint Chief Investment Officer at Anchor Capital