EDITORIAL: No time to be rash over rates
The most obvious and immediate of the risks is that the monetary policy committee’s decision comes just a day ahead of the updates of SA’s sovereign ratings
When the monetary policy committee makes its final interest rate pronouncement for 2017 on Thursday, "risk" is likely to loom large in its narrative.
The most obvious and immediate of the risks is that the committee’s decision comes just one day ahead of the updates of SA’s sovereign rating by S&P Global and Moody’s Investors Service.
That at least one of the agencies will downgrade SA’s local currency rating is a done deal after the government retreated from any promise of fiscal consolidation in October’s medium-term budget policy statement and the president’s attempts to impose free fees on the fiscal framework drove out Treasury budget office head Michael Sachs.
S&P, which junked SA’s foreign currency rating earlier in 2017, had expected much more from the October budget and is almost certain to junk the local currency rating this time around. Moody’s tends to be slower to decide, but even if it does not junk both ratings this time, it will put them on watch for a downgrade within a couple of months.
Regardless of ratings or politics, however, the data on which the committee’s decisions depend are looking a lot worse than they were at the last meeting two months ago
Even if just one of the two agencies downgrades SA’s local currency rating, the foreign bond investors that track the benchmark WGBI index may not want to wait until they are forced to sell once both agencies downgrade. A foreign sell-off of South African bonds is likely, with capital flowing out of SA and the rand taking strain.
The only question is how much of that has already happened and how much of the downgrade has already been priced into bond prices and the rand exchange rate.
This is not the time for the committee to be taking chances; it will have to be ultra-cautious about the exchange-rate risk, just as the Reserve Bank itself will be standing by to manage any turmoil in financial markets that might follow a downgrade.
And after Friday’s ratings, there is still the ANC’s December conference to come, with all the potential implications that could have for the rand.
If it all goes really badly, the monetary committee’s decision to cut rates in July might prove to have been a temporary blip in an interest-rate cycle that is about further hikes, not cuts.
Regardless of ratings or politics, however, the data on which the committee’s decisions depend are looking a lot worse than they were at the last meeting two months ago.
As Credit Suisse economist Carlos Teixeira sums it up, predicting that the door has closed on interest rate cuts, "the rand has weakened sharply, international oil prices have surged; domestic agricultural prices have risen; the probability of a significant hike in electricity tariffs in 2018 has increased; fiscal policy has become more expansionary; and the risk of credit downgrades to subinvestment grade has escalated".
On the upside, third-quarter growth could be better than expected – but if that is the case, it will simply take the pressure off the committee to provide any sort of stimulus to the economy. With October’s budget showing fiscal policy to be more expansionary than it was supposed to be, this is not the time for monetary policy to become more expansionary in any event.
The high level of domestic uncertainty and risk are more than good enough reasons for the committee to keep rates unchanged. They are reason too for the committee to sound hawkish warnings. The next move could well be up.
That is particularly so given that international risk factors add to the domestic ones. The transition to a new US Federal Reserve chairperson may or may not mean a shift in US monetary policy, and the outlook for US tax policy remains highly uncertain. The outlook for European monetary policy is not clear either. There are still big question marks over when and whether the global appetite for risk and yields will crash and what that could mean for emerging markets such as SA.
The committee has to factor into its deliberations and statement that the year may not end well at all.