Why is the Jibar rate falling before any interest rate cuts have been made?

Nedgroup Investments Cash Solutions and the asset manager of their money market funds, Taquanta Asset Managers - the largest cash manager in the country, have noticed a softening in the JIBAR (Johannesburg Interbank Agreed Rate) over the last two plus weeks. This is despite the fact that the Monetary Policy Committee is only due to announce their interest rate decision following their meeting which concludes on Thursday 18 July.

Sean Segar, Head of Cash Solutions at Nedgroup Investments says his team has observed that over the last two weeks the three-month JIBAR has fallen by more than 15 bps, which equates to 60% of the projected 25bps rate cut. The JIBAR rate is determined by the weighted average of three-month negotiable paper issued by banks in South Africa.

“It seems that banks are factoring in the upcoming decision already – similarly to adjustments made in July last year. Essentially, they are “creeping across the line”, pricing in rate cuts that are anticipated by the markets. The fact that banks price the majority of their assets off their Prime rate, which historically only changes following official changes to the Repo rate by the MPC, but a material portion of their funding is linked to JIBAR, means they are scoring from a wider margin,” says Steve Rogers of Taquanta Asset Managers.

This means, as we await the actual decision on rates by the MPC, people and businesses who are cash positive will be negatively affected ahead of time and those that are cash negative will receive no benefit. The key observation will be, if rates are not cut, whether the JIBAR rate  will readjust upwards?

“For now, we await the MPC decision this week and will continue to advise our clients on how best to put their lazy cash to work.  The markets are currently indicating through the forward rates that there will be a 25bps cut on Thursday, and a further 25bps before the end of the year,” says Segar.