Market Commentary




1Q21 Money Market Commentary

By Bongani Ngwanya – Portfolio Manager

Major central banks stuck to the script and kept interest rates unchanged. In its February meeting, the Bank of England (BOE) kept its Bank Rate at 0.1% and the size of the bond buying programme at GBP895bn. In March, The European Central Bank (ECB) announced it was leaving its benchmark Refinancing Rate on hold at a historic low of 0%. It kept its pandemic emergency purchase programme unchanged at EUR1.85tn. Later in March, the US Fed left the Federal Funds target rate range unchanged at 0.00% - 0.25%. The dot plot forecast continues to show the Federal Open Market Committee (FOMC) is going to keep rates unchanged until the end of 2023. The markets had been concerned that rising inflation would force the Fed to reduce asset purchases and raise rates sooner than they had guided. The FOMC confirmed inflation would spike to 2.4% in 2021 before falling back below 2% in 2022.

 Our March Monetary Policy Committee (MPC) meeting also left interest rates unchanged. The Repo Rate remains at 3.5% and the Prime Rate at 7.0%. The decision to leave the rate unchanged at the meeting was unanimous, whereas at the January MPC meeting two out of the five MPC members voted in favour of a rate cut. This signals the end of any chances of future rate cuts. They revised the GDP forecast for this year, to 3.8% from 3.6% previously and left the growth rates unchanged for 2022 and 2023, at 2.4% and 2.5% respectively. The South African Reserve Bank’s (SARB) growth forecasts appear optimistic. The International Monetary Fund (IMF) recently cut its forecast for SA’s real GDP growth to 2.8% in 2021, from 3.0% in a previous report. It forecasts only 1.4% growth in 2022 sighting, similar concerns to the SARB, that the country’s vaccine rollout will be slower than anticipated, the slow pace of structural reform and power disruptions will hinder economic activity. The SARB revised inflation expectations upwards but it continues to remain under control around the mid-point of the inflation targeting band for the next 2 years. A few Emerging Market (EM) central banks hiked interest rates recently, in response to high and rising inflation rates. These were Turkey, Russia, Brazil, and Ukraine. The SARB’s Quarterly Projection Model (QPM) now indicates two increases of 25 basis points each in the second and fourth quarters of 2021. In the previous meeting, they had penciled in increases in the second and third quarters of 2021.

In the IMF’s January 2021 World Economic Outlook release, the fund raised the global growth forecast to 5.5% for 2021, from 5.2% previously, and left the 2022 forecast unchanged at 4.2%. It warned that the recovery is incomplete and uneven. By incomplete they mean global GDP is still below pre-pandemic levels, and uneven because poor countries are lagging behind the rich ones when it comes to vaccinating their populations. It further warned that many low-income countries will be left behind if they do not get help in procuring and rolling out vaccines, or receive debt restructuring and raise their living standards. It also stated that a faster vaccination rollout globally could add USD9tn to global GDP by 2025, with the bulk of the benefits going to developing economies.

 On the performance front for the quarter, the Fund returned 0.96%, bettering the benchmark, Alexander Forbes Short-term Fixed Interest Composite Index (STEFI), by 6 basis points. JIBAR rates continue to inch higher. March’s weekly Treasury Bill (TB) auction size was on average R12.2bn. TB rates were flat in the first few auctions but ticked higher in the latter with good demand seen for 9 month and 12 month TBs.