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US Fed, not CPI to impact Sarb rate decision

Johannesburg – There is a 40% chance of a 25 basis point hike by the SA Reserve Bank (Sarb) in September and a 70% chance for a November hike, emerging markets economist Peter Attard Montalto of Nomura said on Wednesday.

He commented on July’s annual CPI inflation rate that increased by 5%, according to Stats SA.  

The rate was 0.3 of a percentage point higher than the corresponding annual rate of 4.7% in June 2015. On average, prices increased by 1% between June 2015 and July 2015.

Given the tight timing between the US Federal Open Market Committee (FOMC) and Sarb’s MPC meetings in September, the Sarb rate decision “will likely come down to the line and to market reaction”, according to Montalto.

“The key will be the Sarb wanting to be cautious at the curve, even within a hiking framework,” he said.
 
“Our CPI forecast remains largely unchanged – we see the peak falling very slightly to 7% in February. The core profile obviously should fall more, and only really marginally breach its target. Key, however, is that from late this year it is basically flat, within a 5.9 to 6.1% range, with upside risks.”

READ: Interest rates could hit 7% at end-2016

Montalto said Nomura has attributed the less hawkish tone from some MPC members including the governor since the last meeting to their fully digesting the last CPI print.

“The level of fear, around wages in particular, remains high and is in addition to the grinding impact and pass through from a weaker currency. The upside skew of risk factors and the need to clamp down on the expectations channel through real rate normalisation, therefore, remains, but is not urgent,” said Montalto.

“The question around the September MPC and meeting revolves primarily around the timing of a Fed rate hike. Our house call remains that it is still too early to determine whether it will be a September or December lift off.”

He believes the Sarb would be concerned only if there was a resulting major rand and portfolio outflow shock in September.

ALSO READ: CPI inflation increased by 5% in July - Stats SA

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