The South African Reserve Bank is widely expected to keep the repo rate at 8.25% after the election on Wednesday as economists expect the evolving reaction of the rand to the outcome to influence the monetary policy committee’s (MPC) decision on Thursday more than the elections themselves.
This week StatsSA announced that consumer price inflation eased slightly from 5.3% in March to 5.2% in April. As this is still above the mid-point target range of 4.5%, the MPC — meeting the day after the election — is expected to keep rates on hold, with some analysts only expecting a cut early next year.
Efficient Group economist Dawie Roodt said he was confident that the MPC would not be influenced by political developments, but the election outcome could affect exchange rates, which would influence inflation.
“I think the MPC will leave rates unchanged. The message that they’re going to send in the release of the MPC… is inflation is a bit lower. Inflation looks quite good. The rand is doing quite well. I think that the Bank might give us an indication of the expectations on inflation going forward.”
Roodt said he did not expect the Bank to cut rates yet; this depended on several variables, including how the markets responded once the election outcome was clear.
“I think the exchange rate of the currency will be very important to the Bank. If, for example, it becomes clear that the ANC is going to lose big time…then it means that we will have a coalition to the left and that means that the rand is likely to come under quite significant pressure and that means that the Bank will take a slightly more hawkish stance, not because of the political outcome, but because of the exchange rate of the currency.
If there is an ANC coalition slightly to the right... Or maybe even the ANC getting 50%, then the rand is likely to remain on these kinds of levels
— Dawie Roodt
“I, and the Bank is likely to send a kind of neutral message, pretty much the same as previously.”
Roodt said in the event of political violence the market reaction would probably prompt the central bank to take a more hawkish stance.
“The fact that they make the [interest rate] announcement after elections is not really significant, except for as much as the elections could impact the exchange rate … and inflation.”
Antswisa Capital chief economist and director Miyelani Mkhabela said: “Consumer price inflation dropped to 5.2% from 5.3%, which is still above the target mid-point of 4.5%. It would then make the Bank hold the repo rate at the current state. It will not see inflation come down to 4.7% before the end of the year.”
He said the elections will not present a challenge for the MPC and that it was a good time to hold an MPC meeting as the public’s attention would be focused on the election and the results as they trickle in.
“Now it is time for the country and citizens and parties to focus on campaigns. You don’t need a strong urgency of governance to release results that will be used as campaign statements. They must focus on preparing and allowing everyone to vote.”
On the election results themselves, Mkhabela said the chance of a coalition being formed was low. If the ANC did not have to enter one after this election, it would be at least 10 years before such an arrangement might be necessary.
Mkhabela has been invited to speak at ANC events where macroeconomic policy is discussed and has provided the party with economic policy advice.
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