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

The last time the Reserve Bank decided on interest rates, it was a close call. That was true for economists and for the policymakers themselves, who eventually voted 3-2 to keep the repo rate unchanged.

Prior to the September decision by the monetary policy committee (MPC), a Bloomberg survey of economists produced a median forecast for a 25-basis point cut, which would have taken the repo rate to 3.25%. Of the 17 economists, canvassed nine thought the economic and inflation outlook justified more monetary easing.

Going into this week’s meeting,  sentiment has changed with just three out of 17 expecting a change in the main rate, with the rest betting on them staying put. A separate survey by consumer comparison website Finder showed an even more emphatic outcome in favour of no action, with 12 out of 14 economists expecting no change, although 43% believe the bank has space to cut.

The consensus against a cut might seem surprising as not much has changed in the past two months and in some ways the growth outlook, at least in developed markets, has darkened with different versions of lockdown in response to new waves of Covid-19 disease.

As it is, the call to do nothing last time hinged on a single vote, as did the previous decision in July, when two members voted against the reduction that brought the rate to 3.5%. In the May meeting, the disagreement was over the extent of the cut, with three members prevailing with a call for a 75-basis point reduction over those who wanted a slower pace of loosening.

Those calls would suggest it might be dangerous to bet on the Bank going with the consensus view as the MPC itself seems to be engaged in robust debate, and all it takes is for one person to swing one way or the other. Some may argue that this is an argument for a larger committee. The Bank has been rather quiet on whether there are any plans to get the committee back to a full complement of seven members.

For now, we’ll concentrate on the matter at hand.

There is no shortage of strong reasons for the Bank to err on the side of supporting the economy, even as there are indications that the recovery from the historic second-quarter slump might be stronger than it had expected. Nobody would argue that such a pullback represent a structural change in the country’s fortunes.

The international picture is supportive of looser policy, with none of the major central banks even thinking of tightening anytime soon. Just this month, the Bank of England expanded its quantitative easing programme by £150bn (R3-trillion).

While there has been some market exuberance about a breakthrough in the search for a Covid-19 vaccine, policymakers, including Jerome Powell at the US Federal Reserve, are still worried about the outlook, especially with politicians failing to come up with fiscal stimulus. The political atmosphere in the US does not lend itself to a quick solution.

Easy monetary policy for longer in developed markets should be supportive of the rand, which has been among the best performing major currencies since the last MPC meeting, gaining almost 4%. Together with oil prices that have been relatively stable at around $40 per barrel, it is unlikely to be a source of great worry as far as inflation — currently at the lower end of the 3%-6% target range — is concerned.

The arguments for staying put are the same as last time and are not necessarily stronger. The Bank has been among the most aggressive cutters and much of that will still be playing itself into the economy. It might also be having an eye on potential further downgrades for SA.

Starting from such a low base, inflation might accelerate towards target in 2020 fairly quickly, so staying on hold for now may increase the chances of the country enjoying record-low rates for longer.
But don’t rule out the Bank delivering a surprise on Thursday, as it did in September, and this time cutting rates.

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