Labour unrest dominates South African life

South African and Turkish rate decision in the spotlight

Contrary to the Turkish rate decision, the South African Monetary Policy Committee (MPC) rate decision should not bring any changes in interest rate setting next week. Following the somewhat surprising rate cut in July, it is widely expected that the South African central bank will stay on hold at next week’s MPC meeting, maintaining the key policy rate at 5.0%.

Not only because the central bank cut last time and it is unlikely that the SARB would cut twice in a row - not at this moment, but things have changed quite a bit since July. Not that the economy has begun to do better (rather the opposite), but political uncertainty on the back of the escalating labour unrest has increased, making the economy even more vulnerable. This week, in particular, labour unrest in the mining sector became more acute, resulting in production stoppages in the biggest mines in South Africa. This unpleasant development in combination with the unexpected widening of the current account deficit in the second quarter, which was revealed this week, put the South African rand under immediate selling pressure.

Hence under these circumstances we find it unlikely that the South African central bank would cut interest rates next week, risking an even larger sell-off in the rand. Furthermore, the probability of a rate cut in November looks less likely at this moment as well. Looking further into the future, if the economy shows signs of a deeper slowdown, we would not rule out further easing.

Turkey’s central bank (TCMB) may finally cut its policy rate as exporters are complaining about the strong lira and major emerging economies have been easing their monetary policies amid global slowdown. Core inflation is heading south, thus we expect the TCMB to deliver at least a 50bp rate cut on 18 September as economic growth is slowing down. A rate cut by the TCMB would weaken TRY but brighter eurozone prospects would support the lira.

Bank Rossii surprisingly hikes its policy rates on fears of rising inflation

Russia’s central bank unexpectedly increased its main policy rates by 25bp as inflation has started to accelerate since July on raised tariffs and weaker crops. The new refi rate is at 8.25% now, back at the November 2011. The overnight repo rate rose to 5.50% and the depo rate to 4.25%. Despite slowing economic growth, Bank Rossii’s main target has become inflation. CPI climbed to 5.9% y/y in August after recording a post-Soviet low of 3.6% y/y in the spring. Bank Rossii’s target remains 5-6%. Although low inflation is important politically, high rates have been hurting Russian corporations and their willingness to expand investments. Following the decision, the rouble advanced more than 0.6% against the basket versus opening levels.

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