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Cape Town - There are compelling reasons for the SA Reserve Bank (Sarb) not to hike interest rates this week, Citi Research, a division of Citigroup Global Markets, said on Monday in its weekly macro economic overview.
The report noted that, although Citi Research expects the Sarb to be hawkish, there will be no interest rate hike.
The group, however, cautioned that the Sarb could hike sooner than expected. "Our list of reasons for no hike are only valid for this week’s Monetary Policy Committee announcement. Thereafter there is a rapidly increasing risk that tighter monetary policy is possible," said Citi Research's Gina Schoeman.
The group lists 3 reasons why the Sarb won’t hike rates at the conclusion of it Monetary Policy Committee meeting on Wednesday:
1. Anchored inflation expectations make rate hikes difficult to justify
Citi Research believes that the ultimate trigger for a hiking cycle is rapidly rising inflation expectations. The Sarb has a few measures it watches:
The Sarb typically quotes the spread between the R203 and R211 bonds (4-year maturity) and the spread between the R186 and R197 bonds (10- to 13-year maturity). These rates have increased by a respective 0.4 percentage points (pp) and 0.2pp since the November 21 2013 MPC meeting, likely driven by currency weakness over the period.
The Sarb also watches the Reuters econometer, a survey of mostly financial market analysts.
"The November and December econometer surveys have shown some moderation for the first half of 2014 but arguably, the December inflation poll has risen for each quarter barring the last quarter of 2013," said Citi Research.
Another gauge the Sarb watches is the BER inflation expectations survey, which includes forecasts from financial analysts, trade unions and corporates. "While the previous two measures of inflation expectations are important, we believe that the BER survey is ultimately the indicator for the Sarb as to whether inflation expectations are anchored or not.
"This is because to justify tighter monetary policy on the overall economy, the overall economy’s inflation views need to be accounted for.
"In 13 years of the BER inflation expectations survey this is the longest continuous period that expectations have changed as little between consecutive quarters. As a result, even though 2014 average inflation is expected just above the 6% target ceiling (6.1%), this is technically ‘anchored’."
Citi Research however points out that the most recent BER survey dated Q4 2013, does not take into account the almost -10% further weakening in the rand/dollar exchange rate since December 2013.
"It is also true that the December Reuters econometer and break-evens suggest that the category of financial analysts should deliver higher inflation expectations in the March 2014 BER survey, which may well lift the overall average.
"However, we believe the Sarb would prefer to be absolutely certain about inflation expectations and will therefore wait for the March 2014 survey results."
2. Downside CPI surprises adds to the puzzle of pass-through
Citi Research noted that the last time the monthly inflation print surprised to the upside was July 2013. "This not only lowers the starting point for the Sarb’s inflation outlook but is also visual evidence that the rand pass-through continues to be moderate."
It said additional proof of the relatively benign currency effect to-date is sticky core inflation, remaining at 5.3% for four consecutive months.
"Finally, durable and semi-durable goods inflation has kept to modest rates of 2.3% year-on-year (YoY) and 3.4% YoY respectively. This is not to say that there hasn’t been acceleration in their inflation rates through 2013 as there has, but rates below-headline CPI give the Sarb more time to deliberate whether currency pass-through is in fact its model’s output coefficient of 20% or if it might be lower."
3. Downside risk to GDP growth
The research firm said 2013 GDP forecasts surprised substantially to the downside having started the year at a forecast of 3.0% and ending the year at a forecast of 1.9% as per the Reuters econometer.
"Again, strike action in mining and manufacturing mostly was a key driver of disappointing growth, but in addition the slowdown in unsecured lending and moderate real income growth owing to rising inflation played a part.
"Put together, the Reuters outlook for 2014 GDP is currently 2.8% but we believe the Sarb sees more downside than upside risk to this expectation."
Citi Research said Sarb governor (Gill Marcus) has been a long-standing global growth bear and vocally critical of the negative impact of strikes in the economy.
"As near-impossible as it is to forecast strike action in the coming year, we believe the MPC is mindful of the political tension between trade unions and that this may well be the Achilles heel of the economy again this year."
The report noted that, although Citi Research expects the Sarb to be hawkish, there will be no interest rate hike.
The group, however, cautioned that the Sarb could hike sooner than expected. "Our list of reasons for no hike are only valid for this week’s Monetary Policy Committee announcement. Thereafter there is a rapidly increasing risk that tighter monetary policy is possible," said Citi Research's Gina Schoeman.
The group lists 3 reasons why the Sarb won’t hike rates at the conclusion of it Monetary Policy Committee meeting on Wednesday:
1. Anchored inflation expectations make rate hikes difficult to justify
Citi Research believes that the ultimate trigger for a hiking cycle is rapidly rising inflation expectations. The Sarb has a few measures it watches:
The Sarb typically quotes the spread between the R203 and R211 bonds (4-year maturity) and the spread between the R186 and R197 bonds (10- to 13-year maturity). These rates have increased by a respective 0.4 percentage points (pp) and 0.2pp since the November 21 2013 MPC meeting, likely driven by currency weakness over the period.
The Sarb also watches the Reuters econometer, a survey of mostly financial market analysts.
"The November and December econometer surveys have shown some moderation for the first half of 2014 but arguably, the December inflation poll has risen for each quarter barring the last quarter of 2013," said Citi Research.
Another gauge the Sarb watches is the BER inflation expectations survey, which includes forecasts from financial analysts, trade unions and corporates. "While the previous two measures of inflation expectations are important, we believe that the BER survey is ultimately the indicator for the Sarb as to whether inflation expectations are anchored or not.
"This is because to justify tighter monetary policy on the overall economy, the overall economy’s inflation views need to be accounted for.
"In 13 years of the BER inflation expectations survey this is the longest continuous period that expectations have changed as little between consecutive quarters. As a result, even though 2014 average inflation is expected just above the 6% target ceiling (6.1%), this is technically ‘anchored’."
Citi Research however points out that the most recent BER survey dated Q4 2013, does not take into account the almost -10% further weakening in the rand/dollar exchange rate since December 2013.
"It is also true that the December Reuters econometer and break-evens suggest that the category of financial analysts should deliver higher inflation expectations in the March 2014 BER survey, which may well lift the overall average.
"However, we believe the Sarb would prefer to be absolutely certain about inflation expectations and will therefore wait for the March 2014 survey results."
2. Downside CPI surprises adds to the puzzle of pass-through
Citi Research noted that the last time the monthly inflation print surprised to the upside was July 2013. "This not only lowers the starting point for the Sarb’s inflation outlook but is also visual evidence that the rand pass-through continues to be moderate."
It said additional proof of the relatively benign currency effect to-date is sticky core inflation, remaining at 5.3% for four consecutive months.
"Finally, durable and semi-durable goods inflation has kept to modest rates of 2.3% year-on-year (YoY) and 3.4% YoY respectively. This is not to say that there hasn’t been acceleration in their inflation rates through 2013 as there has, but rates below-headline CPI give the Sarb more time to deliberate whether currency pass-through is in fact its model’s output coefficient of 20% or if it might be lower."
3. Downside risk to GDP growth
The research firm said 2013 GDP forecasts surprised substantially to the downside having started the year at a forecast of 3.0% and ending the year at a forecast of 1.9% as per the Reuters econometer.
"Again, strike action in mining and manufacturing mostly was a key driver of disappointing growth, but in addition the slowdown in unsecured lending and moderate real income growth owing to rising inflation played a part.
"Put together, the Reuters outlook for 2014 GDP is currently 2.8% but we believe the Sarb sees more downside than upside risk to this expectation."
Citi Research said Sarb governor (Gill Marcus) has been a long-standing global growth bear and vocally critical of the negative impact of strikes in the economy.
"As near-impossible as it is to forecast strike action in the coming year, we believe the MPC is mindful of the political tension between trade unions and that this may well be the Achilles heel of the economy again this year."
