The South African central bank (SARB) is facing a difficult decision today: Should it lower its key rate by another 25 basis points or should it leave it unchanged at 6.5% in view of all the uncertainties (Moody’s rating decision, oil price development, fiscal policy risks, etc.) looming?
“All in all, the economy is weakening and there is a lack of investment,”says Alexandra Bechtel of Commerzbank.
“Although a new recession was narrowly avoided, it is too early to give the all-clear. At the same time, inflation rose somewhat more strongly in August (+4.3% yoy, +0.3% mom) than expected, but is still comfortably within the SARB’s target corridor.
“In combination with the recovery of the Rand since the end of August, we believe there is room to lower key interest rates further today. Today’s interest rate decision will mainly depend on the SARB’s assessment regarding the existing uncertainties: The rating agency Moody’s has recently sent out positive signals. These indicate that South Africa’s investment status will not be affected in the short-run, but only the outlook will be lowered.
“The situation on the oil market also appears to be easing somewhat after the drone attack on Saudi Arabia. Against this background the probability that key rates will be lowered today increased significantly in our view. Whilst a rate cut is expected to last on the Rand short-term, a no-change decision is likely to be priced in.”
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