Gill Marcus and Pravin Gordhan comment

Speaking at a WESGRO investor lunch in Cape Town yesterday, SA Reserve Bank Governor Gill Marcus touched on a number of key themes for the domestic and global economies, a key focus of which was the current debate about the strength of the rand and the wall of money that continues to flood emerging markets.

The SARB is of the opinion that capital flows into emerging markets will continue into next year, and we think this signals that the Bank's inflation forecast will likely be reduced at upcoming meetings.

The governor went on to say that the solution to ZAR strength is "not clear cut" and that the desired outcome of Brazil's tax on inflows was “short-lived”. All this speaks to recent comments by the SARB that, although it remains concerned about the strength of the rand, there is very little it can do (by itself).


While our [Absa's] view that rates will be cut 50bp in early-2011 supports a view of FX intervention, this is unlikely to be the underlying objective of the bank, but rather, that further downside surprises in CPI open the door for another rate cut – keeping in mind that the SARB made mention last week that headline CPI of 3% or below is indicative that some sectors are experiencing deflation.

The governor remained largely gloomy on the domestic growth front, mentioning that manufacturers will remain under pressure, supporting the bank's recent downward revision to its GDP forecasts for 2010 (2.8%) and 2011 (3.2%). The governor reiterated once again that monetary policy is limited in its ability to create employment, adding that interest rates and the ZAR alone cannot solve South Africa's hurdle to get from 3% to 7% economic growth.

We think this draws on Governor Marcus's recent comments at the Monetary Policy Forum, where she said that a cohesive policy response from both monetary and fiscal policy is required. Comments along the lines of "monetary policy to remain accommodative for some time" and "'extraordinary times need extraordinary measures” support our view that a 50bp rate cut is on the cards – we are pricing this into the first MPC meeting of 2011 (dates not yet confirmed).

On the fiscal front, Finance Minister Pravin Gordhan also made mention of fiscal policy’s response to the current global FX environment yesterday. The minister mentioned a potential global "trade war" (as countries compete to weaken their currencies), saying that it is not prudent to "put national interest second to global interest".

We think yesterday’s comments from the minister signal that large amounts of FX intervention are unlikely in the Medium-Term Budget (MTBPS) next week (Wednesday, 27 October 2010); however, we are keeping an eye out for further loosening of exchange controls.

Source: Absa Bank