SA Reserve Bank. Picture: MARTIN RHODES
SA Reserve Bank. Picture: MARTIN RHODES

There is just under a month to go before the SA Reserve Bank’s monetary policy committee (MPC) decides on interest rates again, and yet it seems most commentators have already made up their minds.

The early consensus is that we shouldn’t be counting on another rate cut, adding to the 0.25-percentage-point reduction in July, when the MPC wraps up its next meeting on September 19. 

This might seem premature considering the weak economy, subdued inflation and the growing consensus that some of our biggest trading partners are set to embark on a new wave of monetary stimulus.

From protests in Hong Kong to Brexit and the ongoing China-US trade tensions, there isn’t a shortage of headwinds for the global economy, a fact that has been reflected in global financial markets. A positive headline here and there might disturb the pattern temporarily, but it’s broadly a period of weak stock markets and surging bonds.

If one looks at European bond markets in isolation, you could be convinced that we are in the midst of an economic calamity. Some markets there have no sovereign debt securities with yields above zero.

It was strange enough a decade ago when fund managers and banks were paying governments, such as that of Germany, to hold their money for a year or two, but now yields in Europe’s largest economy are negative all the way to 30 years. If you want the Swiss government to keep your money for 50 years, you have to pay for the privilege.

The rush to fixed income looks even more baffling when one considers that the world looks nothing like the Great Depression-type conditions that prevailed in the wake of the global financial crisis that started in 2007. 

Central bankers gathering at the Federal Reserve’s Jackson Hole symposium will have a lot to talk about, and all eyes will be on chair Jerome Powell’s speech on Friday. That will be preceded by the release on Wednesday of the minutes of the Fed’s July meeting, after which Powell did so much to confuse markets and drive turbulence despite the delivery of a much anticipated rate cut.

Investors who are addicted to never-ending rounds of stimulus were left spooked by his statement that the July 31 cut was merely a “mid-cycle adjustment”, which they took to rule out a more aggressive easing cycle.

That, together with an escalation in the US-China trade tensions after President Donald Trump said he would impose fresh tariffs, has been behind much of the sell-off in riskier assets and demand for bonds, which are regarded as safe havens. The Financial Times reported this week that the stock of global bonds with negative yields climbed above $16-trillion (about R246-trillion). 

In an environment of falling yields across the globe, one would normally expect the rand to benefit as traders go hunting for yield, snapping up higher-yielding alternatives. It should also be an environment that’s supportive of our central bank cutting interest rates because it means it can do so without it being unduly worried about capital flight.

We should be so lucky. When global sentiment is driven by fear rather than greed, it’s not usually a time for emerging markets to prosper. And the same culprit will likely ensure SA consumers don’t benefit from a new round of global easing. And that is the rand.

While the Bank doesn’t target a particular level for the currency, it has consistently cited its potential volatility among the major risks to its inflation target, and recent developments will not have put policymakers at ease.

From being relatively stable to strong, the rand has declined 6.5% against the dollar in August, the worst performer among emerging currencies after the hapless Argentine peso, which is down 21%. Among the major currencies tracked by Bloomberg, only the Turkish lira is set to be more volatile than the rand in the next month.

The domestic news has hardly been supportive.

From Eskom’s never-ending crisis, or the debate over the National Health Insurance Bill, SA hasn’t exactly been giving investors compelling reasons to buy rand assets.

And that probably means this easing cycle will pass us by.