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Johannesburg - Despite the South African Reserve Bank (Sarb) keeping
interest rates on hold on Thursday, markets will be spooked by the
central bank's forecasts, said Razia Khan, regional head of research for
Africa at Standard Chartered Bank.
The Sarb forecast inflation averaging 6% in 2012 and briefly breaching the inflation target of 6%, although mainly on the basis of cost push pressures.
Khan said the Sarb's emphasis on the temporary nature of the inflation breach was, however, all-important.
"They have stressed that under these conditions, there is not necessarily a need for the central bank to react. Moreover, inflation is seen peaking at 6.3%, just slightly higher than the inflation target," she said.
"Even though, from this perspective, an imminent rate hike is still far from a done deal (note the slight reduction in Sarb growth forecasts from 3.7% to 3.6%), we expect South African bonds to react adversely to the Monetary Policy Committe (MPC) communiqué," Khan said.
She said the bond market had been too complacent about risks, rallying in the last week despite the scheduled MPC meeting.
"With everyone focused on the weakness of growth, the very real inflation risks appeared to have been forgotten. This MPC communiqué will serve as an important reminder, and bearish sentiment should be reinforced next week, when we expect to see a jump in April CPI (consumer inflation) to 4.5% year-on-year from 4.1% previously.
"The tone of the communiqué - and press conference - was undoubtedly hawkish, an important departure from the much more measured statement we saw at the last MPC meeting. Standard Chartered Bank maintains its forecast of a repo rise in Q4 2011, with some risk that monetary tightening will be brought forward if the rand should weaken more than expected," Khan said.
The Sarb forecast inflation averaging 6% in 2012 and briefly breaching the inflation target of 6%, although mainly on the basis of cost push pressures.
Khan said the Sarb's emphasis on the temporary nature of the inflation breach was, however, all-important.
"They have stressed that under these conditions, there is not necessarily a need for the central bank to react. Moreover, inflation is seen peaking at 6.3%, just slightly higher than the inflation target," she said.
"Even though, from this perspective, an imminent rate hike is still far from a done deal (note the slight reduction in Sarb growth forecasts from 3.7% to 3.6%), we expect South African bonds to react adversely to the Monetary Policy Committe (MPC) communiqué," Khan said.
She said the bond market had been too complacent about risks, rallying in the last week despite the scheduled MPC meeting.
"With everyone focused on the weakness of growth, the very real inflation risks appeared to have been forgotten. This MPC communiqué will serve as an important reminder, and bearish sentiment should be reinforced next week, when we expect to see a jump in April CPI (consumer inflation) to 4.5% year-on-year from 4.1% previously.
"The tone of the communiqué - and press conference - was undoubtedly hawkish, an important departure from the much more measured statement we saw at the last MPC meeting. Standard Chartered Bank maintains its forecast of a repo rise in Q4 2011, with some risk that monetary tightening will be brought forward if the rand should weaken more than expected," Khan said.
