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The conclusion of the Monetary Policy Committee (MPC) meeting is expected to see Reserve Bank Governor, Lesetja Kganyago, leave lending rates paused for the time being as recent economic data would appear to support such a decision.
A surprise, 3.3% quarter on quarter GDP growth reported in Q2 2016, and large narrowing of the current account deficit to 3.1% of GDP have led to what appear to be mildly improving economic conditions. While economic growth is not necessarily the Reserve Bank’s primary data point when deciding the path of lending rates, the better than expected data would certainly consider the possibility of a ratings downgrade at year end having reduced probability of occurring.
In turn we have seen some domestic catalysts for rand strength, while inflation, a key metric for the rates decision, has moderated below levels previously forecast by the central bank. Weak retail sales data, reported recently, will however be a reminder that the local consumer remains under pressure and a raising of rates would provide even further pressure to a highly indebted consumer.
While no hike to the repurchase rate is expected on Thursday, risks to the commencement of the tightening cycle do remain. A ratings downgrade at year end is still possible (although the probability thereof is now considered below 50%), with socio-political risk still prevalent and state owned enterprises under pressure as investors become less willing to lend to those with governance issues and troubled balance sheets.