Interest rate likely to stay unchanged
20 May 2014
On 22 May, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) will announce the decision on interest rates and some economists believe the repo rate will remain unchanged.
On 22 May, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) will announce the decision on interest rates and some economists believe the repo rate will remain unchanged.
On 27 March, the MPC left the repurchase rate unchanged at 5.5 percent per annum.
SARB Governor Gill Marcus at the time said the MPC “is acutely aware of the policy dilemma of rising inflation pressures in a subdued economic growth environment.
Given the lags with which monetary policy operates, the MPC will continue to focus on the medium-term inflation trajectory.
The committee is aware that too slow a pace of tightening could undermine inflation expectations and may require more aggressive tightening in the future. Consistent with our mandate, a fine balance is required to ensure that inflation is contained while minimising the cost to output.”
Investec’s Annabel Bishop says the repo rate is likely to stay unchanged in May on rand strength and the ongoing, marked deterioration in the country’s economic growth.
She notes that the rand has strengthened from R10.87/USD, R15.02/EUR and R17.97/GBP at the time of the March MPC meeting, to R10.34/USD, R14.18/EUR and R17.39/GBP currently.
The exchange rate is substantially stronger than it was in January when it reached R11.11/USD, R15.41/EUR and R18.69/GBP, pointing out that the bank hiked its repo rate by 50 basis points in January following the rand-related deterioration in its inflation forecasts.
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Bishop explains that at the March MPC meeting, the bank’s CPI forecast for 2015 improved to 5.8 percent y/y on the rand’s strength, but the 2014 forecast was unchanged.
“The material strength in the rand since March should both improve the 2014 forecast, potentially lowering it to 6.2 percent y/y, and more importantly, lower the 2015 forecast to 5.7 percent y/y, giving the MPC room to leave interest rates unchanged this month,” says Bishop.
Furthermore, she points out that the 2015 CPI inflation forecast of the Reserve Bank is the most important for monetary policy as the SARB targets inflation in the 12 to 18/24 month period, and this period is likely to continue to show CPI inflation well within target.
The SARB cannot influence the inflation outcome by altering interest rates in less than six months time, and only has limited influence in the six to 12 month period, according to Bishop.
“Given also the substantial deterioration in economic growth, and the warnings from the ratings agencies on South Africa’s economic growth deteriorating further, we continue to expect that no change will occur in the repo rate at the May MPC meeting.”
Economic growth has weakened substantially in South Africa since 2011, is still in the process of deteriorating and is at risk of approaching the 1.0 percent y/y mark this year after recording 1.9 percent y/y in 2013, 2.5 percent y/y in 2012 and 3.6 percent y/y in 2011, she points out.
Meanwhile, Peter Attard Montalto, analyst at Nomura, says they expect a hike in July and believe that at the last meeting, the MPC was ready to hike rates this week, but that a fine-tuning stance in the first half of the cycle is still weak although it is increasing.
CPI pass-through normalisation and lower global growth expectations should all cause the key swing for voters on the MPC to wait for another meeting.
Montalto notes that there has been a string of downside surprises for the market in terms of high-frequency data and the platinum strike is still ongoing.
The SARB’s expectations of overall growth with downside risks should be unaltered by this in our view, but its growth forecasts may have fallen a notch or two further as a result, according to Montalto.
“Overall, we would now assign a 45 percent probability to rates remaining unchanged, a 25 percent probability to a 25 basis points rate hike and a 30 percent probability to a 50 basis points hike,” he says.
However, he points out that they may be proved wrong (should a hike occur for example) if 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, say, wage dynamics, he adds. – Denise Mhlanga
Courtecy of http://www.property24.com/articles/interest-rate-likely-to-stay-unchanged/19883
