Johannesburg – There is a 45% probability that the SA Reserve Bank will keep interest rates unchanged at the next meeting of the Monetary Policy Committee (MPC), according to Peter Attard Montalto[1], emerging markets expert at Nomura.
He believes there is a 25% probability of a 25 basis points rate hike and a 30% probability of a 50 basis points hike.
“We may be proven wrong if a hike may occur because the MPC has private survey evidence of increased pass-through, becomes more forward-looking on inflation in the near term or has other private information on wage dynamics, for instance,” said Montalto.
“A hike may also be of higher likelihood if consumer price inflation (CPI) surprises meaningfully to the upside at next week’s print – particularly in core.”
Nomura is, therefore, pushing out its hike forecast from the next MPC meeting to the July meeting, but adds that its conviction is low and uncertainty high.
“We believe at the last meeting the MPC was ready to hike at the May meeting next week, but that a fine-tuning stance in this first half of the cycle, still weak (though increasing) CPI pass-through normalisation and lower global growth expectations, should all cause the key swing voters on the MPC to wait for another meeting,” he said.
“Such a delay, however, would create communications problems, reinforcing the views of some that the January hike only occurred because Turkey hiked.”
Real GDP
Sanisha Packirisamy, an economist at Momentum Asset Management, said at the latest MPC meeting, the Sarb downgraded their real GDP growth forecasts for SA, but kept their inflation forecasts relatively steady, posing a further dilemma for monetary policy.
“In our view, the Sarb is likely to revise these forecasts even lower, given the on-going labour tensions in the platinum mining industry, where strike activity has entered its 16th week,” Packirisamy told Fin24.
To date, employees have lost nearly R8bn in wages, while the industry has lost around R18bn in revenues.
Although mining only constitutes around 6% of total real GDP, mining exports account for nearly half of SA’s total exports.
“The extended strike activity, therefore, exerts further pressure on growth and the already-extended current account deficit,” she said.
Currency weakness
On the back of currency weakness in the earlier part of the year, the Sarb had upwardly revised their 2014 inflation forecast to 6.3% in January from 5.2% a year ago.
“The MPC kept the inflation projection steady at the March meeting, but the recent retracement in the currency could allow for a marginal downward revision to the inflation outlook, particularly on a 7-9 month view which is the traditional lag between the movement in the currency and the consumer inflation basket,” said Packirisamy.
“We expect inflation to remain sticky in the short term as the lagged impact of a weaker currency exerts upward pressure on both headline and core measures of inflation.”
Furthermore, rand food prices could remain elevated on the back of rising meat prices as farmers rebuild herds, putting pressure on meat supplies.
Retail and manufacturing inflation proxies both suggest further upward pressure on inflation measures.
“Since April 28, when it became apparent that the US sanctions on Russia were not going to be as severe as originally anticipated, emerging market currencies took a breather from Ukraine geopolitical-related concerns,” said Packirisamy.
The rand has appreciated by over 3% against the US dollar since 28 April, but remains over 9% weaker on a one-year rolling basis.
“The recent pullback in the currency may present the Sarb the opportunity to moderate inflation expectations and to keep rates on hold, in the face of disappointing high frequency data suggesting that the first quarter’s real GDP number for SA may come out below expectations,” she said.
“Going forward, we expect the local unit to remain vulnerable given weak macro fundamentals (raising the potential for a further sovereign downgrade) and SA’s vulnerability to capital flows to fund the extended current account deficit.”
To date, inflation expectations have remained close to the upper band of the 3-6% inflation target but has not breached the target markedly.
“It is likely that the Sarb will keep a watchful eye on whether inflation expectations increase meaningfully as this is likely to have a negative impact on core inflationary measures,” said Packirisamy.
Further rate increases
While the probability of a hike at the next MPC meeting has softened on the back of weaker growth data and a relatively firmer domestic currency, Packirisamy is still expecting further rate increases this year.
“We expect a further two hikes, owing to mounting inflationary pressures and an elevated current account deficit, of 50 basis points each, this year with a further potential 50 basis points in March next year,” she said.
She expects the cycle to end at 7.0%.