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Cape Town - Nomura's emerging markets economist Peter Attard Montalto said he expected a 50 basis-point hike from the South African Reserve Bank's (Sarb's) monetary policy committee (MPC) next week.
Montalto said the MPC sees two key factors: "inflation fear with policy rate fine-turning due to such low growth, and then real rate normalisation as the Fed (US Federal Reserve) moves towards hikes and the US yield curve reacts".
Said Montalto: "This first half of the rate hiking cycle is about balancing such weak growth with very real concerns for a majority of the MPC about inflation risks." A consumer price index level of 6.6% in May and a likely figure of 6.7% for June "will be of serious concern, even if the peak is only temporary, given the wage round that has now begun".
Pay increase
Turning to the current strike wave, Montalto said he believes the industrial action by the National Union of Metalworkers (Numsa) will be far more worrying to Sarb than the recently-ended strike by the Association of Mineworkers and Construction Union.
This is "not only the number of workers affected, but also the fact that, with Numsa being such a large union, such a large pay increase would be much more easily 'transmitted' to other sectors of the economy than would be the case with Amcu".
"Currently, a 9-11% wage settlement for different levels of workers seems likely, which would concern the MPC. While we think the Sarb has overplayed the risks of a wage-inflation spiral to some degree in the past, we think that fear is still very much present and again enough to tip it over into a hike," said Montalto.
Weak growth
Montalto said the gross domestic product scenario "has been broadly unchanged for the MPC for some time now even as the forecasts fall – i.e. extremely weak domestic growth with a very anaemic recovery thanks not so much to external factors, but strongly negative self-imposed domestic factors resulting from policy choices and structural issues of the economy and body-politic.
"Hence, we believe it can hike with such an 'unchanged' growth view, and we still believe the MPC decided some time ago that it was not its job to address structural constraints on growth, and ultimately while weak growth would slow any hiking cycle (stop-start), it could not change a need to tackle inflation.
Said Montalto: "Strategically, we think the MPC understands that it cannot strongly and persistently communicate it is in a hiking cycle and not hike for six months."
In overview, "we see a very reluctant MPC having to hike within an extremely difficult growth/inflation mix", said Montalto.
- Fin24
Montalto said the MPC sees two key factors: "inflation fear with policy rate fine-turning due to such low growth, and then real rate normalisation as the Fed (US Federal Reserve) moves towards hikes and the US yield curve reacts".
Said Montalto: "This first half of the rate hiking cycle is about balancing such weak growth with very real concerns for a majority of the MPC about inflation risks." A consumer price index level of 6.6% in May and a likely figure of 6.7% for June "will be of serious concern, even if the peak is only temporary, given the wage round that has now begun".
Pay increase
Turning to the current strike wave, Montalto said he believes the industrial action by the National Union of Metalworkers (Numsa) will be far more worrying to Sarb than the recently-ended strike by the Association of Mineworkers and Construction Union.
This is "not only the number of workers affected, but also the fact that, with Numsa being such a large union, such a large pay increase would be much more easily 'transmitted' to other sectors of the economy than would be the case with Amcu".
"Currently, a 9-11% wage settlement for different levels of workers seems likely, which would concern the MPC. While we think the Sarb has overplayed the risks of a wage-inflation spiral to some degree in the past, we think that fear is still very much present and again enough to tip it over into a hike," said Montalto.
Weak growth
Montalto said the gross domestic product scenario "has been broadly unchanged for the MPC for some time now even as the forecasts fall – i.e. extremely weak domestic growth with a very anaemic recovery thanks not so much to external factors, but strongly negative self-imposed domestic factors resulting from policy choices and structural issues of the economy and body-politic.
"Hence, we believe it can hike with such an 'unchanged' growth view, and we still believe the MPC decided some time ago that it was not its job to address structural constraints on growth, and ultimately while weak growth would slow any hiking cycle (stop-start), it could not change a need to tackle inflation.
Said Montalto: "Strategically, we think the MPC understands that it cannot strongly and persistently communicate it is in a hiking cycle and not hike for six months."
In overview, "we see a very reluctant MPC having to hike within an extremely difficult growth/inflation mix", said Montalto.
- Fin24
