There is a moderately high (40%) chance of an interest rate hike by the Monetary Policy Committee (MPC) of the South African Reserve Bank next week, said Peter Attard Montalto, emerging markets economist at Nomura.
But in general, he sees the repo rate remaining unchanged at 7% this time around and certainly rate cuts nowhere close. This is because he reckons the MPC median mode of pausing where possible while still being in a hike cycle remains.
He explains that the uncertainty on the decision is “acute” given that consumer inflation data will be released only shortly before the rate announcement.
Nomura expects inflation to tick up marginally, but pointed out that inflation expectations have been more stable at around the top of the target.
“The MPC framework and the way the MPC works have not fundamentally shifted in our view despite Brexit and the fall in global rates, counter to what many investors think,” said Montalto.
“In other words the MPC is still in a hiking cycle, rates are still below neutral and the MPC still wants to get there.”
Montalto explained that the MPC now sees a slightly bigger output gap, with more non-structural and non-domestic forces like Brexit. He also thinks the MPC sees a little more short-term support for the rand.
“But medium-run worries around downgrades and the period after the local elections from political risk remain,” he cautioned.
“Overall, we think the MPC will have enough hawkish material by maintaining views around downgrade risks and the market may be underestimating Fed hike risks over the medium run. The MPC will want to keep projecting its concerns about anchoring especially as inflation is set to rise towards year-end.
“Even if anchored now, we think risks are high that expectations can easily become unanchored in a wage-round year with food price issues. This is the type of ‘fear’ that could drive the MPC to hike the rate at this meeting.”
Herman van Papendorp (head of investment research and asset allocation) and Sanisha Packirisamy (economist) of Momentum Investments expect a further hike of 25 basis points by the MPC before the end of the year.
“We anticipate further modest tightening given the Reserve Bank’s view that exploiting a short-term trade-off between growth and inflation — lower interest rates to accommodate growth in spite of rising inflationary pressures — will be less beneficial in the long run,” they explained.
The MPC’s latest inflation forecast points to a slightly lower 5,9% forecast in 2016 (previously 6,2%), while their projections for 2017 and 2018 have remained intact at 5,7% and 5,2%, respectively.
The Reserve Bank’s decision to hold rates steady at the previous MPC meeting was in line with previous comments that monetary policy tightening was expected to proceed at a moderate pace, according to Van Papendorp and Packirisamy.
“Even though inflationary pressures have been underpinned by supply-side shocks — rising food prices and a sharp sell-off in the exchange rate — the Reserve Bank remains mindful of potential second-round impacts which could lead to more generalised price pressures in the remainder of the consumer basket,” they said.
Reduced inflation outlook
Citi Research expects an unchanged repo rate decision next week. This comes off the back of its recently reduced inflation outlook given that it now expects the upward inflationary factors this year to unwind more quickly in 2017, according to economist Gina Schoeman.
“Because the Reserve Bank typically justifies rate hikes off a breach in the 6% target ceiling 12 months out or further, the fact that CPI should be moving below 6% in the second quarter of 2017 means there is no obvious reason to tighten monetary policy right now,” explained Schoeman.
“However, for the foreseeable future, we do see risks to the upside for the repo rate, given that the Reserve Bank has justified a rate hike before off substantial inflation risk when the inflation outlook has been within target but inflation expectations remain too high.”
The second quarter inflation expectations survey released the same day as the MPC meeting will, therefore, be important to watch, she said.
Citi Research furthermore attaches a lower probability to a rate cut over the medium-term horizon, because in its view, it is not likely that the CPI will drift confidently below 5% and towards the mid-4,5%-point; “base effects argue for a rise in 2017 GDP growth to around 1% and the current MPC members would only deliver a rate cut if they were confident they would be cutting the rate more than once”.
