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Full-blown global trade war would negatively affect SA’s repo rate

Interest rate kept steady, with possible cut forecast for the first quarter of 2020.

NOMPU SIZIBA: The Reserve Bank’s Monetary Policy Committee has kept interest rates unchanged, with the repo rate remaining at 6.75%. Governor Lesetja Kganyago says inflation expectations have moderated, but he cautioned that inflationary pressures do remain.

Well, in the studio with me I have Annabel Bishop. She is group economist at Investec. Thanks very much for joining us, as always, Annabel.


NOMPU SIZIBA: Good stuff. Leaving rates unchanged was pretty much in line with expectations, wasn’t it?

ANNABEL BISHOP: I think it was exactly in line with expectations. Perhaps what wasn’t expected was such a dovish move from the perspective of the tone – the Reserve Bank really coming across as considering an interest-rate cut. Two out of five members, essentially. And of course even their model indicates we may have an interest-rate cut coming down the line. So I think that was probably fairly unexpected.

NOMPU SIZIBA: Unexpected but positive, no doubt, given the fact that our economy is really struggling and the Reserve Bank is now estimating that we are going to grow at 1%, as opposed to 1.3% before.

ANNABEL BISHOP: I think the big risk is that if we see this escalation in global trade tensions – a lot of it in the news today – turning into a full-blown global trade war, you are going to see significant risk-off in global financial markets, a lot of selling of emerging market assets, and substantial rand weakness. And from that perspective we would not be able to get an interest-rate cut, with the risk going up of emerging market assets, and potentially even eventually looking for a hike to try and curb massive selloffs. So let’s hope we don’t go into that negative elevated risk-aversion environment.

But obviously it depends on what happens in terms of China and the United States. China is now saying it may not negotiate any further, given the level of acrimony it has actually been taken to. So a bit of a worry on that.

NOMPU SIZIBA: A big worry indeed. Governor Lesetja Kganyago did refer to that, talking about how the trade tensions could indeed affect South Africa. What you’ve just outlined to us – do you think that’s what he was talking about, or was he also talking about us being directly affected from a trade perspective?

ANNABEL BISHOP: I think essentially both. The worry is obviously that significant ramifications of such a global trade war could take a significant amount of economic growth globally, and then of course affect us, being a small, open economy.

NOMPU SIZIBA: They did mention that inflation expectations have moderated, and they gathered from the private sector and unions and so on that their expectations are also lower. What’s driving this lower inflation forecast?

ANNABEL BISHOP: We’ve seen inflation come off quite sharply since 2016, dropping from about 12%, which was significantly high, to closer to about 2% for food-price inflation. That’s a big component of the inflation basket, above 15%, pulling CPI inflation down with it. Remember as well, electricity price increases have moderated. We haven’t had such big increases. Of course, that’s not the case for this year, unfortunately. Obviously we are aware of a little but of currency appreciation as well. Looking forward, the expectation is that we could perhaps see inflation rise now – we haven’t really reached the low point for 2018/19, and there may be lift-up towards 2021.

So these are some of the concerns. Obviously if we move into a substantially weaker exchange-rate environment, that would exacerbate the petrol price situation in South Africa, and that would push up inflation. That also has driven inflation down. Low inflation of course also helps to enforce lower inflation expectations, so hopefully we don’t go to a major global risk-off environment because that currency weakness tends to feed through quite soon into inflation in South Africa.

NOMPU SIZIBA: Specifically on food inflation, how is it that we continue to have quite moderate food inflation, especially when there were concerns that we are not going to produce enough crop in certain areas?

ANNABEL BISHOP: Well, I think the maize harvest has proved to be pretty good, and we have produced enough, even to export. So that is a good outcome.

And even in terms of the winter crop harvest – canola, wheat and other crops that we produce in South Africa – the weather conditions seem to have improved materially in some of those planting areas, leading to an expectation that they may do a bit better than previously expected. But of course meat prices, being a big one, are heavily weighted in the food price component, and those prices fell into deflation a while ago. They are expected to pick up a little, but not to really see substantial price inflation in the near term going forward.

So really we are in a sweet spot in terms of food-price inflation, but one wouldn’t expect to see falling inflation or what is termed dis-inflation persist forever.

NOMPU SIZIBA: The Reserve Bank has an interest-rate quarterly projection model. What’s it saying in terms of its move on interest rates up until about 2021?

ANNABEL BISHOP: I think it is essentially forecasting or allowing us to have an interest-rate cut of about 25 basis points in the first quarter of next year. So good news. That’s what we were talking about earlier in the show for South Africa. Of course, things can change. The factors that feed into the model could produce higher inflation; but, as things stand, it looks like inflation could continue to moderate. I think the conversation for South Africa is going to really shift around when we might see this rate cut –as we said, if we don’t suddenly see some massive deterioration in the inflation drivers.

NOMPU SIZIBA: And then, just in terms of the organisation or setup there at the Reserve Bank, what’s happening in terms of the deputy governor, Daniel Mminele, who is set to leave soon? Is there going to be a replacement?

ANNABEL BISHOP: There will have to be a replacement. I think you’ll have to ask the governor that. [Chuckling] Or actually the president.

NOMPU SIZIBA: Annabel, we are going to leave it there. Thank you so much.

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