Why didn't the Reserve Bank Cut Interest Rates...


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The South African Reserve Bank kept interest rates the same, in line with market expectations (Reserve Bank, Reuters)

Petrol is expected to go up by 70c per litre and diesel by 60c in December. (Business Tech)

More than half of South Africans are more than 3 months or more behind on their debt repayments according to the National Credit Regulator. (Business Report)


Emmerson Mnangagwa has succeeded Robert Mugabe as president of Zimbabwe. At this stage there are no indications that opposition parties will be included in government (Bloomberg)

US President Donald Trump has re-listed North Korea as a “state sponsor of terrorism” and added additional sanctions (Forbes)

Delos Temple (source: Wikipedia)

Delos Temple (source: Wikipedia)

The end of this year will mark the 30 year anniversary of the creation of the MSCI Emerging Markets Index, which kick-started investing in the developing world. Out of interest, the earliest recorded “EM” crisis occurred around 2,400 years ago when 10 Greek municipalities defaulted on their loans to the Delos temple. (MSCI, Business Insider)


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The economy is terrible, next year won’t be much better and if you live in Johannesburg’s northern suburbs (not to mention Cape Town) you don’t even have water. Just when we could all really use a hand, the South African Reserve Bank unanimously decides that...

“In light of the high degree of uncertainty prevailing in the economy and the balance of risks, the MPC has decided that it would be prudent to maintain the current stance of monetary policy at this stage. Accordingly, the repurchase rate remains unchanged at 6.75% per annum.”

What! Surely if things are so uncertain then cutting interest rates would  help people out? Unfortunately it doesn’t quite work like that… we’ll explain.

What is the Reserve Bank anyway… (skip 2 paragraphs if you know whether an individual can own part of the Reserve Bank)

The Reserve Bank is South Africa’s central bank. It is responsible for setting interest rates, managing gold and foreign exchange reserves and regulating the banking system. Although the President of South Africa chooses the Governor and 3 the 3 deputy governors, the Reserve Bank is a private institution and was actually listed on the Johannesburg Stock Exchange until 2002. The autonomy of the Bank is protected by the Constitution it must must “perform its functions independently and without fear, favour or prejudice”. The Bank is however still accountable to Parliament.

… and the Repo rate?

The repurchase or “Repo” rate is the rate at which the Reserve Bank lends money to the banking sector (FNB, Standard Bank etc.). The banks then lend this money to ordinary South Africans based on a reference rate, called Prime. So, while the Reserve Bank sets the Repo rate (currently 6.75%), it is the effect that the Repo rate has on Prime (currently 10.25%) that impacts individuals and businesses. If interest rates go down, people tend to borrow more money and spend it. This speeds up economic growth, but also increases inflation.

So, what’s  the Reserve Bank trying to do?

The objective of the Reserve Bank is to “maintain price stability in the interest of balanced and sustainable economic growth in South Africa”. Price stability means keeping consumer price inflation within a range of 3 - 6%. The Bank believes the rand exchange rate is the single biggest driver of inflation because of the effect that it has on the prices of imported goods (e.g. oil and therefore petrol) and wages. Higher interest rates tend to result in a stronger rand because 1) higher interest rates = lower inflation and low inflation prevents a currency becoming worthless and 2) nice high interest rates encourage foreigners to save their money in SA. All of which explains why the Reserve Bank is actually so interested in protecting the rand.

The chart above shows Reserve Bank's inflation forecasts for 2017 and 2018 at various points in time. Inflation expectations have been coming down.

The chart above shows Reserve Bank's inflation forecasts for 2017 and 2018 at various points in time. Inflation expectations have been coming down.

So it’s about tough love?

Exactly, remember how runaway inflation destroyed the Zimbabwean economy a decade ago. At the moment the Reserve Bank is worried about 3 big things that impact the rand and inflation. The first is the price of oil, which has gone up from US$45 per barrel in June to nearly US$65 today. This has sent petrol prices up R1.00 since September. The second issue is uncertainty around who the next leader of the ANC will be, which has weakened the rand. The third issue is a larger than expected increase in wages. As a results the Reserve Bank has very slightly  increased its inflation forecast for 2018 and 2019 to 5.2% and 5.5%.

But what about the growth of my business…

Unfortunately the Reserve Bank is stuck in a damned if you do / damned if you don’t situation. The Bank has revised its 2018 and 2019 growth forecasts down slightly to 1.2% and 1.5%.  I’m sure that they are desperate to cut rates to stimulate the economy. The problem is that political uncertainty, government policy instability (e.g. nuclear power, the mining charter and free education) and potential for credit downgrades are all factors beyond their control.

Growth forecasts have come down steeply since 2015, but are now moving up very slightly.

Growth forecasts have come down steeply since 2015, but are now moving up very slightly.

Where to from here for interest rates?

The Bank’s own projection model indicates that interest rates will need to go up a total of 0.75% points by 2019 (i.e. Prime of 11%). This will obviously increase your borrowing costs and slow the economy further. The Bank does however stress that it is not forced to follow the model’s conclusions. So maybe a slightly smaller increase.

The Reserve Bank's model forecast for the Repo rate

The Reserve Bank's model forecast for the Repo rate

What would we have done differently?

We have a slightly different view and think that rates should have been cut more aggressively a few months ago. This would have given SA some desperately needed growth, boosted confidence and  left the Bank some wiggle room to increase rates again to protect the rand.

(IMF, South African Reserve Bank, Bank for International Settlements, News24, Bloomberg)

Good luck out there!


Important note: The Louwdown is our opinion on finance and economic matters, it is not investment advice. Speak to your broker or advisor.


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