Market Commentary




4Q20 Money Market Commentary

By Bongani Ngwanya – Portfolio Manager

The South African Reserve Bank (‘SARB’), in line with consensus forecasts, decided to leave the repo rate unchanged at 3.50% in November 2020. In the lead up to the meeting, some market participants advocated for one more rate cut given the Rand’s strength and low levels of inflation, but the Bank chose to stay put for a second consecutive Monetary Policy Committee (MPC) meeting. What can we expect for 2021? The Quarterly Projection Model (‘QPM’) forecasts were left unchanged. They suggest that the first upward movement in the repo will occur towards the end of 2021 when a 25-basis point increase might occur, followed by a similar increase in the first quarter of 2022. In the question-and-answer session, the message from the Governor was clear that in terms of monetary policy they have done all that they can, and it was now up to the fiscus to start implementing growth supportive initiatives.

Over in the United States (‘US’), the Federal Open Market Committee (‘FOMC’) also maintained a steady stance on interest rate policy. As expected by the market, the Federal Funds target rate range was left unchanged at 0.00% to 0.25%. Given the rising economic headwinds brought on by the second wave of Covid-19 infections, some had hoped the Federal Reserve (‘Fed’) would increase its asset purchases programme (‘QE’) which it kept unchanged. The FOMC statement said it would purchase assets at a monthly pace of at least $120 billion (‘bn’) per month ($80bn US Treasuries and $40bn mortgage-backed securities) until ‘substantial progress has been made toward maximum employment and price stability goals’. The statement mirrored their ‘dot plot’ guidance on interest rates. The guidance is for no change in rates until the end of 2023.

The Rand, other Emerging market currencies and bonds have been the beneficiaries of the Fed and other developed economy central banks’ maintenance of record low interest rates and accommodative monetary policy. The Rand in particular has ignored all sorts of negative domestic news and appreciated over 30% from its April low of R19.35. The other catalysts that have driven the build-up of risk appetites globally have been the election of Joe Biden as the new president of the US in November 2020 and the earlier than expected development and rollout of vaccines to fight the Covid19 pandemic. With advanced economies awash with liquidity and their cash and bonds returning next to nothing, it is not too difficult to imagine the Rand remaining relatively resilient.

SA’s November headline Consumer Price Index (‘CPI’) inflation came in at 3.2% year on year (‘y/y’), in line with consensus expectations. This was a slight improvement from the 3.3% recorded in October. Core CPI inflation also improved coming in at 3.3% y/y from 3.4% in October. It does appear that CPI inflation will likely track around the lower end of the SARB’s target range. The only flies in the ointment are food and fuel inflation which have surprised on the upside with bread, cereal and meat being the biggest culprits. With inflation under control and the Rand resilient, it is no surprise that some in the market have been calling for one more rate cut