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Cape Town - The latest repo rate hike of 25 basis points by the SA Reserve Bank's Monetary Policy Committee (MPC) on Thursday came down to higher inflation risks and not an extended breach in the Consumer Price Index (CPI) outlook, according to market research company Citi Velocity.
READ: SA hikes interest rates
Citi Velocity is, therefore, of the opinion that Sarb rate decisions from here on will be a very different story than before.
"Our low gross domestic product (GDP) forecast of 1.8% in 2016 and 1.8% in 2017 argues for a CPI forecast that doesn’t breach for more than one quarter. However, the risks to our baseline view are large given how close CPI remains to the 6% ceiling - straddling the fourth quarter 2016 breach of 6.3% is a forecast for 5.8% in the third quarter of 2016 and 6.0% in the first quarter of 2017," explained Citi.
In its view, it would not take much to push these quarters higher. The rand, electricity tariffs and food prices are the three main risks to the Sarb's CPI outlook. It believes all three these factors have gained momentum since the previous MPC meeting in September.
The MPC decided to hike despite a lower CPI outlook, only temporary breaches and a lower gross domestic product (GDP) outlook.
"It is obvious that upside inflation risks are unlikely to dissipate, so the door is now open for more rate hikes," it concluded.
"The rules have changed. Since the hiking cycle started in January 2014, the Sarb’s track record has suggested that a degree of inflation would be tolerated - because of the lack of demand pull inflation - and so it has only hiked off ‘extended’ breaches of two quarters or more, as otherwise inflation expectations would become unanchored."
ALSO READ: 6 graphs that led Sarb to increase repo rate
