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South Africans should brace for another rate hike

by Staff reporter
11 Mar 2016 at 11:52hrs | Views
Cape Town - The South African Reserve Bank (Sarb) is set to hike rates, according to two prominent economists who believe a 25 basis-point interest rate increase will likely be the outcome of the next monetary policy committee (MPC) meeting.

"Next week's MPC meeting is likely to be a tug of war between different factors which makes it more difficult to establish serious conviction on, unlike the January meeting," Nomura emerging markets economist Peter Attard Montalto said on Thursday.
"Broadly, the tug of war will be between a slightly more bullish (i.e. benign) inflation path and a stronger ZAR compared with the last meeting, vs a range of bearish other factors including wage round fears and expectations. Ultimately, we think the latter will win."
Montalto believes Sarb's growth forecast should be more or less unchanged, as fourth-quarter GDP data would not have been too much of a surprise. "Overall, then, we think the broad balance of the growth vs inflation narratives on both the baseline and the skew of risks remains broadly unchanged for the MPC."
Labour issues will be in the spotlight, with Sarb "getting more worried about the forthcoming wage round and the ability of the imminent gold sector wage conflict to skew larger manufacturing and other mining sector awards later in the year".
On top of that, the Sarb is increasingly studying the impact of food price shocks on expectations, wages and long-run sticky second-round effects in inflation, he said.
Rates could even remain unchanged
Montalto sees a 55% chance of a 25 basis-point rate increase. "We think a 50bp hike is very unlikely and so see a 45% (chance) of rates remaining unchanged. Put another way, we would not be surprised if rates were unchanged."
However, whatever the outcome, Sarb is firmly on course for a cycle of rate hikes: "We expect strong signals of future hikes and the MPC set on a hiking path, highlighting the risks and fears outlined above," said Montalto.
Gina Schoeman of Citi Research concurs in part with Montalto: "We expect the Sarb MPC to hike the repo rate 25bp next week, to 7.00%. Our view is premised on the MPC's CPI (consumer price index) outlook still breaching the 6% target ceiling for an extended period, made more uncomfortable by a rise in Q1 inflation expectations."
The MPC's statement in January presented an eight-quarter breach in the Sarb's CPI outlook and this, together with higher risk, justified the 50bp hike at the time, said Schoeman. However, she expects Sarb to announce a shorter inflation breach next week because of five key factors:
1. January's 50bp hike will reduce CPI in 12 months by around 0.1 percentage point;
2. The dollar-rand rate is 5.0% stronger and the nominal effective exchange rate has gained 4.4%;
3. Eskom's electricity tariff increase is confirmed at a lower 9.4% than Sarb's 12.2% estimation, deducting 0.1pp off 2016 and 2017 CPI;
4. The GDP outlook may reduce slightly which, barring a reduction in potential growth estimates, means a slightly wider output gap; and
5. CPI food is likely to peak earlier which, owing to base effects, allows the 2017 profile to reduce sooner.
Schoeman's CPI outlook has a shorter five-quarter breach but she cautions that this is still extended and remains within the reach of monetary policy effectiveness, with hikes starting to show an effect on CPI after four quarters.
"This is hard to stomach alongside still-high risk on the economy and out-of-target inflation expectations. Despite a stronger ZAR since January, there is no doubting its touch-and-go outlook: volatile global markets, hugely uncertain politics and the risk of a sub-IG foreign currency rating looms over the economy," said Schoeman.
She believes the MPC will raise interest rates to address the inflation breach and inflation expectations sooner rather than later. 

Source - fin24