Market Commentary




3Q20 Money Market Commentary

By Bongani Ngwanya – Portfolio Manager


The South African Reserve Bank (‘SARB’) recently released its Monetary Policy Review (‘MPR’). The review is a biannual event where the Bank provides the market with insights into its monetary policy. The key takeaways from the review are that (i) we should not expect another rate cut; (ii) the Bank’s decision to frontload the 275 basis points (bps) is bearing fruit and (iii) the upcoming Medium Term Budget Policy Statement (‘MTBPS’) will partly determine what they will do with the repo rate in the upcoming months.

Several market participants have argued for one more rate cut before the end of this year. Quoting from the MPR, “with domestic interest rates at record lows, and inflation apparently having bottomed out, it is likely that the repo rate will move somewhat higher in future. However, this normalisation of repo is likely to be gradual, with rates staying at low levels for an extended period. While the Monetary Policy Committee (‘MPC’) has not committed to any specific path for interest rates, the Quarterly Projection Model (QPM) projections suggest that the first upward movement in the repo will occur towards the end of 2021, with rates still not back to pre-crisis levels by the end of 2022 (the outermost part of the forecast period). This outlook has the same basic inflection point as market pricing, from the Forward Rate Agreement (‘FRA curve’), and analysts’ expectations.” In a nutshell, it does not appear we will be getting another cut.

The monetary stimulus brought on by the 275 bps in rate cuts is having the desired effects. The review cites the fact that new consumer mortgage applications and instalment sales applications have hit ten-year highs. Despite the labour force shrinking by more than a fifth (a record 2.2m job losses) in the second quarter in response to South Africa’s strict lockdown and resulting economic plunge that saw GDP fall by 16.4% quarter on quarter and 17.1% year on year, many fortunate people were queuing to buy houses and cars.

The National Treasury’s upcoming MTBPS will be a key event for our nation.  The expectation is Treasury will detail its plans for debt stabilisation in the coming years. Given the unresolved dispute regarding this year’s public sector wage increases and what could be deemed as an about turn in supported SOE’s, the market is of the view the MTBPS has a high likelihood to disappoint. However, if the Finance Minister presents a credible programme which has the backing of cabinet and the ruling party, the exchange rate should strengthen creating an opportunity for the MPC to cut the repo rate further if required.