Johannesburg - The three-month negotiable certificate of deposit (NCD) closed Monday at a yield of 12.100%, just a little higher than the current repo rate of 12% and hence holding out only a small possibility of a rate hike on Thursday. At current levels, the clear majority therefore expect an unchanged stance.
The market had been factoring in higher increases in interest rates, but were surprised on June 12 when the Monetary Policy Committee increased rates by just 50 basis points rather than the expected 100 basis points.
"The money market has strengthened quite a lot in the past month, now expecting that rate hikes have ended. It was sparked by all the talk of the CPI reweighting and rebasing," explained a senior money market dealer.
"Personally, I don't see how right all of this is as the market and analysts have consistently underestimated inflation," he added.
A month ago the three-month rate was at 12.350%, but is now at an even lower [stronger] 12.100%. This is the area most likely to be factoring in the August rate decision.
Look through the peak
The market is therefore very confident that there won't be a hike, but there is still a chance, as if there was no chance then the three-month rate would be below the repo," explained the dealer.
The dealer noted that investors do expect consumer inflation to remain very bad, but to peak.
"They think the central bank will look through the peak - but what if it keeps peaking - they can't just look through it forever," concluded the dealer.
The consensus is for South Africa's repo rate to remain unchanged at 12% in August, according to a survey of 13 leading economists by I-Net Bridge.
The South African Reserve Bank's (SARB's) Monetary Policy Committee (MPC) begins its two days of deliberations on Wednesday, with the final decision due just after 15:00 on Thursday.
Of the 13 respondents surveyed, a majority of ten felt the repo would remain unchanged, with three predicting a 50 basis points increase.
Most respondents also felt the tightening cycle will be over, but that if another increase happened, then August's increase would mark the end of the cycle.
The MPC increased the repo rate by 50 basis points to 12.00% in June - against a consensus expectation that the increase would measure 100 basis points after particularly hawkish comments from the central bank governor on May 28.
With no increase now, the prime overdraft rate would remain at 15.5% and the current tightening cycle, which began in June 2006, at 500 basis points.
Tightening cycle
Many commentators feel the inflation level is due to peak soon and that this will be a key consideration by the MPC, as to hike now may not have the desired effect if inflation does indeed peak and come down. Monetary policy operates with a lag to full impact in the economy of around six months.
The repo rose as high as 13.5% in September 2002, before receding to 7% in April 2005, with the current tightening cycle then beginning in June 2006.
After a December 2007 50 basis point hike, the MPC had paused in January.
- I-Net Bridge