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Local Market Commentary
- The Bank of Zambia held pat on its policy rate for a second straight meeting, citing easing inflationary pressure. Governor Kalyalya said that a recovering Zambian Kwacha which has gained by almost 25% against the dollar, aided by improved metal prices and better domestic food production have helped slow inflation. Speaking to reporters Kalyalya said that “it was appropriate for us to maintain the policy rate at 9% due to the sharp decline of inflation that may tend towards 6-8% at the end of the year.” Kaalyalya added that the Monetary Policy Committee also took the decision to hold due to the positive effects in implementing fiscal consolidation and relatively weaker growth prospects in the medium-term.
- Inflation is forecast at 12.5% in 2022, compared with 13.2% previously forecast. The decision by the central bank is likely to provide some support to the economy at a time global growth is under pressure and price pressures are mounting due to the war in Ukraine, extreme weather, and tightening financial conditions.
- Meanwhile, Information and Communications Technology Director at the BoZ Greg Nsofu yesterday said that the bank refused to pay ransom to a group known as Hive that was behind a cybersecurity breach that caused minimal damage to its systems. According to Nsofu, “all of our core systems are still up and running. Note much sensitive data has been actually shipped out.” Recall the central bank on May 13 reported that it had suffered a suspected cyber-attack that disrupted some information technology applications on May 9, including its website and bureau de change monitoring system. Its website was down for at least part of May 14 too.
- Base metals did not have a good day yesterday as the comments by the Fed raised red flags surrounding the growth prospects for the US. We also received word that permits for new home builds in the US tumbled to a five-month low and this is expected to fall further as higher mortgage rates reduce affordability.
- China also remains a stumbling block at the moment. Reuters reported the U.S. Treasury Secretary Janet Yellen as saying that COVID-19 lockdowns in China appear to be impeding supply chain recovery and a broader slowdown in growth in the world’s No. 2 economy could have global spillover effects.
- This morning we copper recovering slightly following yesterday’s 1.15% loss. The 3m LME benchmark is currently up around 0.5% at the time of writing as we head into the EU open.
- In the FX markets, consolidation was the order of the day as the Zambian Kwacha closed relatively unchanged yesterday. Meanwhile, as global stocks tumbled, the USD regained its safe-haven status and rallied against most majors overnight. The EUR is trading back below the 1.0500 mark, while the GBP is trading back below the 1.2400. Investors have turned concerned about the outlook for growth amid high inflation and rising interest rates and the insensitivity of the guidance offered by the central banks that seem comfortable with the volatility that financial markets are experiencing. From current levels, that might still be acceptable. However, should stocks tumble 10-15% from current levels, the appetite for persisting with aggressive tightening will fade. Given the growing asymmetrical risks with so much priced into the USD, it is unclear how much further the USD can appreciate.
Rand and International FX Commentary
- Decision Day has finally arrived, and the SARB will take centre stage. In question is not whether the SARB will hike or not but by how much. Consensus expectations have the SARB hiking 50bp in response to the guidance from the Fed that it will be raising interest rates by 50bp increments over the next two meetings. Fearing that a more modest 25bp might leave the ZAR vulnerable to negative speculation, the SARB might oblige to ensure that any carry attractiveness is restored and that SA builds a buffer to an appreciating USD.
- That certainly sounds logical, and if the SARB wanted to justify the strong rate hike, that would be one defendable way of doing so. However, it is not the full picture. SA is a very different economy from that of the US, and the SARB was more pre-emptive than the Fed. Not only did the SARB not embark on full-blown QE through the pandemic that needs to unwind, but they also started hiking pre-emptively and raised interest rates when inflation was still well within the target range. The Fed, by comparison, is behind the curve and playing catch up. So the first point to debate is whether the SARB is in a desperate enough position to become more aggressive simply because the Fed is playing catch up.
- The second point to make is that the SA economy is weak, extremely weak and faces numerous structural deficiencies that cannot be resolved for years to come. These include the burden on growth by the SOEs such as Eskom, Transnet, the Ports and others. SA has no demand-side drivers of inflation. Unemployment is at a record high, consumptive demand weak, fixed investment just as soft, and the credit cycle heavily constrained. Any supply-side energy shocks could be more recessionary than inflationary. Furthermore, core inflation is trading below the mid-point of the 3-6% inflation target range, while headline inflation remains within the band, albeit at the margin. By comparison, the US is fighting an extremely tight labour market, a more robust economy that is consuming more than it is producing, a strong credit cycle and inflation that is multiples of its target.
- The contrast is extreme, so a strong argument could and should be made for the SARB to persist with its more gradual, measured and conservative approach to tightening that the private sector can adjust to more easily. It could prove counterproductive to choose to be more aggressive at such a fragile time in the SA economy when pre-covid economic activity levels have not yet been achieved. Finally, one needs to question why the SARB needs to hike rates more aggressively when it is supply-side shocks that are causing the inflation, over which the SARB has no control. If one were convinced that those would lead to a sharp and stubborn rise in inflation expectations, one might have an argument to make. However, that is unlikely to be the case in a weak economy where money supply growth remains weak. However, given what the markets have already priced in, a 25bp hike could generate some volatility for the ZAR.