While there may be room for an interest rate cut late in 2013, this is only likely if inflation remains in check and it’s more likely that interest rates will stay level. 
This is according to Ian Ferguson, head of distribution at Nedgroup Investments Cash Solutions, who says that interest rates have been falling since they peaked at 15,5% in June 2008 and, despite many false calls that the next move in rates would be up, have continued to fall.
“It is over four and a half years since they peaked and if current forecasts are correct, we will witness one of the longest and flattest interest rate cycles ever,” he says.
Ferguson says inflation trended down in 2012, starting out at 6,1% and reaching 5,7% at December having touched a low of 4,9% in July.
“Consensus forecasts are that inflation will remain contained in 2013, possibly temporarily breaching the 6% inflation target band ceiling before falling back into target range by the end of the year.”
He cautions that the rand poses significant risks to this outlook, as increased volatility in the exchange rate will make it difficult to forecast policy changes.
“If some stability returns to the rand and the subtle inflation trend continues, then it is possible that there may be further policy easing later in the year. However, the most likely outcome is that interest rates will remain flat well into 2014,” he says.
This view is confirmed by the forward rate agreements (FRAs) traded in the capital markets.
“FRAs indicate that the market is pricing in a 12% probability of a 50bps cut in rates by mid-2013. The probability of a rate cut has diminished since the third quarter of 2012, when markets were pricing in a 50% chance of a 50bps cut. Looking further out along the FRA curve, the markets are pricing in a 65% chance of a 50bps rate hike in the third quarter of 2014,” says Ferguson.
Ferguson warns that a combination of tough economic environment, unclear local politics and labour unrest remains a concern in the coming year. He says this is likely to result in local growth figures being suppressed, in spite of a more positive global growth sentiment.
Against this backdrop, Ferguson believes it would be difficult for the Reserve Bank to hike rates and therefore that an accommodative monetary policy stance is most likely.
However, the SARB has drawn attention to the risks of an inflation/wage spiral if wage settlements continue to be above inflation. As a result, Ferguson says inflation figures will attract attention over the forthcoming months as indications of high inflation will limit the ability of the Reserve Bank to provide further stimulus to the economy. Ferguson says investors should be careful not to chase yield in this environment.
“Although yields delivered by money market and income funds have fallen in line with interest rate cuts, this has occurred with a lag – as longer dated instruments held in such funds mature and are replaced with new instruments at the lower prevailing yields. Furthermore, strong demand is driving yields down even further as investment managers bid aggressively in search of yield,” he says.
Ferguson points to recent statistics released by ASISA, which show that investors have actually moved up the risk curve in search of yield as they react to the lowest rates since 1973.
“This trend is likely to continue and even escalate if rates do trend sideways for another year especially amongst South African non-financial corporates who are sitting on cash balances of R571-billion per the South African Reserve Bank.”