The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The last time the monetary policy committee met, in March, one member voted for a rate cut. That was even though the meeting just happened to be in that week of the roadshow recall.

Indeed, the committee announced its decision to hold rates just hours before President Jacob Zuma’s shock late-night cabinet reshuffle.

But at the time that the committee sat, the inflation outlook was looking more benign than before, thanks to a stronger rand and declining food prices, while SA’s growth prospects were looking weak.

That should have supported a rate cut, in the eyes of one member, and in subsequent weeks some in the market did start to anticipate a cut, especially after the rand turned out to be much more resilient than expected to the reshuffle and to the rating downgrades that followed.

Now, as the committee begins its May meeting, the short-term inflation outlook seems to be even more benign — and growth prospects are even weaker.

The drought is ending. The rand is holding up, sort of. And consumers are so under pressure financially and business and consumer confidence are so muted that demand in the economy is very weak, limiting businesses’ ability to put up prices. Some economists see the consumer price inflation rate going below 5% in 2017, even though it will not yet go below the 4.5% midpoint of the inflation target range.

On the growth side, while the IMF has revised its growth forecast slightly up for 2017, to a princely 1%, many other economists are revising down to well below 1% — and some now expect 2018 will be worse. All else being equal, that should prompt the committee at least to consider cutting rates, if not now, then next time.

That is particularly so if the view is taken, as do analysts such as Old Mutual’s Dave Mohr and Izak Odendaal, that the favourable global environment that has seen capital washing into emerging markets will continue, with US President Donald Trump’s administration falling apart, the dollar weak, low yields in developing markets and a rebound in global growth.

But a rate cut would be a very bad idea and markets should not expect one soon. Indeed, in such an uncertain and high-risk global and domestic environment, the next move, whenever it is, is surely as likely to be a hike as to be a cut.

That is because it is not clear what the benefit of a rate cut would be.

Investment and growth in SA are not being held back by interest rates: the problem is politics and confidence and the lack of any growth drivers.

Stanlib economist Kevin Lings makes the point that the risks of a cut would outweigh any benefits.

And the risks are sizeable. Globally, sentiment on emerging markets is volatile and could turn any time — as shown by last week’s sudden currency crashes on Brazil’s bad news.

Domestically, inflation might come down in 2017. But the Reserve Bank’s horizon for targeting inflation is 2018 and into 2019 — not the next few months. Inflation could well go up again over that period.

The weather is one risk. The rand is an even larger one.

The ANC’s policy and elective conferences could well deliver outcomes that investors and ratings agencies will not like. SA is still on the cusp of a downgrade of its domestic currency ratings and if that happens, in 2017 or early 2018, well more than R100bn will flow out of SA and the rand could crash, sending fuel prices and inflation soaring.

The committee’s statement this week is likely to spell out all those risks. And though no one expects a cut, the vote should be interesting.

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