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Cape Town - The key question is whether new South African Reserve Bank (Sarb) governor Lesetja Kganyago can maintain his stance that South Africa was in a rate hiking cycle when the Monetary Policy Committee (MPC) meets next week to determine whether rates should be changed, said Nomura emerging markets economist Peter Attard Montalto.
Writing in the investment and financial service’s company's Sarb preview, Montalto said the expectation was that the MPC would keep the rates unchanged at 5.75% this month. The committee meeting is scheduled next week to run from Tuesday to Thursday, January 27 to January 29.
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Noting that last year Nomura had written an early preview for the MPC meeting “and it ended up hiking because of the outflow shock that hit South Africa and emerging markets more generally in the … two weeks before the meeting”, Montalto said, while the risk “theoretically still exists this year, the oil backdrop (dropping prices) clearly makes such a surprise (hike) much less likely”.
Kganyago – a former Treasury director general who took over from Gill Marcus when she retired last year – said late last year that falling oil prices and benign food prices had served to improve the inflation outlook, but he added that the Sarb remained in a gradual policy tightening cycle.
Warning of a continuation in the rate hiking cycle, he said rates would rise in future depending on what happened to the inflation outlook and domestic economic growth. The timing of interest rates hikes in the US and the impact of this on the rand would also have a bearing, Kganyago noted.
Nomura said the decision next week would be taken against “likely downward revisions to headline Consumer Price Index (CPI) forecasts” for the Sarb and “probably” accompanied by broadly unchanged growth forecasts.
Nomura believes the MPC would maintain its concerns about South Africa’s vulnerability “and …the currency, wages and inflation expectations that leads to worries about the long run trajectory for core inflation”.
The latter was particularly of concern in the year of Fed hikes and a major public sector wage round plus the troubles at the state power monopoly Eskom.
It would be difficult to argue in this context that South Africa was still in a hiking cycle, Nomura argued.
“Such a line is only credible if you look through the current oil shock and for second round effects of oil on core (inflation). At the last MPC meeting it saw no pass-through effects,” said Montalto.
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With Nomura forecasting a 5.5% headline and 5.8% core inflation – below the inflation targeting band 6% to 3% – which Nomura described as “a huge V-shape in inflation” coupled with oil price falls “which may continue”, it was hard to argue South Africa was still in a rates hiking cycle.
“We will have to await (January’s) CPI number, but our forecast and other evidence we have suggests that so far there is no pass through,” he said.
Montalto argued that the risks “are balanced around our forecast on core and to the downside on headline… we will have to see if the Sarb itself has any further information on food costs from lower transportation costs. It is probably still too early for particularly strong effects, if at all, to be evident yet. The March and particularly May MPCs should be much more instructive in this regard”.
The March MPC is scheduled for 24 to 26 of that month, while the following MPC is scheduled for 19 to 21 May. The other MPCs of the year are scheduled for July 21 to 23, September 19 to 23 and 17 and November 17 to 19, according to the Sarb website.
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