DG Kganyago touted as Marcus successor

Cape Town -  The Reserve Bank’s decision to leave its repo rate unchanged on Thursday does not necessarily imply the interest rate hiking cycle is over, said Sanlam Investments economist Arthur Kamp.

He said it seems the Sarb is likely to remain tolerant of expected inflation outcomes close to the upper limit of the inflation target range, while real economic activity remains weak and inflation expectations remain relatively stable.

"Indeed, should inflation slow to within the inflation target band in 2015, as we expect, this would provide pause for thought."

Reserve Bank governor Gill Marcus announced that the Monetary Policy Committee decided to keep interest rates unchanged on 5.75% (prime rate 9.25%) despite sluggish economic growth.

The MPC decision was 6 to 1 to keep the repo rate unchanged.

After delivering the MPC statement Marcus, in question time, also announced that she will not renew her term when it comes to an end on November 8.

READ: Rates announcement - as it happened

Possible successor

Citi Research economist Gina Schoeman named Deputy Governor Lesetja Kganyago as the most likely candidate to succeed Marcus, having served as Sarb DG since 2011 and Treasury DG before this (2004-11).

"We believe DG Kganyago is well respected by markets and though 'prudently hawkish' is also inclined to give due respect to GDP prospects," Schoeman said.

Schoeman said the appointment is also decided by both President Jacob Zuma and Finance Minister Nhlanhla Nene "and Kganyago worked with Minister Nene for many years".

Schoeman said even though the rand did not react kindly to the news of Marcus’s imminent departure (R11.09/$), Citi believed that the markets will react favourably if Kganyago was announced as the new Sarb governor.

On the decision to keep rates unchanged, Schoeman said this was expected.

"A softer inflation profile together with downside risk to GDP means no urgent need to hike anytime soon," she said.

"However, it should be noted real interest rates, including the Reserve Bank’s repo rate, remain well below their historic averages," said Kamp.

Sanlam Investments expects the Sarb to shift towards a less accommodative stance over time. "After all, the Bank is likely to prefer inflation outcomes materially lower than its current level of more than 6% if growth lifts as expected in the medium to longer term."

Inflation risks

For Schoeman the rand exchange rate and wages remain the major upside risks to the inflation outlook.

"Unless the GDP sees a significant near-term rebound its downside risks are a strong counterbalance to upside inflation risks.

"We (therefore) maintain that the repo rate remains at 5.75% until the second quarter of 2015 when the Fed (US Federal reserve) starts hiking. Thereafter we expect 100bp in total rate hikes for 2015, ending the year at 6.75%," Schoeman said.

FNB chief economist Sizwe Nxedlana said whilst the Sarb opted to leave rates unchanged, the bank remains of the view that a gradual normalisation of interest rates will continue during 2015 and 2016.

"The timing of rate hikes will be dependent on domestic growth considerations and the timing of rate normalisation in the US."

He advised borrowers to plan for higher interest rates over the medium term and to use the current low rate environment to pay down debt.

Excellent service, leadership

Zuma thanked Marcus for her excellent service and leadership in a media statement shortly after she announced she would not renew her term as Sarb governor. She served for five years.

"She has steered the bank during the difficult periods of the global economic and financial recession and ensured the achievement and maintenance of stability."

Zuma said the government valued Marcus's contribution immensely and wished her all the best in her future endeavours.

- Fin24