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Cape Town - The SA Reserve Bank's Monetary Policy Committee is seen to take the tiniest gap on Thursday to take a breather in its interest rate hike cycle.
According to Nomura's emerging markets economist Peter Attard Montalto the Sarb MPC may take a tiny space to pause, but with a very hawkish stance on further hikes in the current cycle.
He puts the chance of a 25 basis point hike, however, at 45%.
Montalto said the upcoming MPC meeting is probably one of the most difficult to call as the Sarb needs to play down inflation fears in a slow-growth environment.
"Inflation fear trumps all if necessary. However, in a slow-growth environment, you hike as slowly as you can and take room to pause if available. But as a corollary of these two, it means that you can pause but still have eyes set on a high-end point to the cycle," he said.
It will, however be very close, and highly dependent on Wednesday’s CPI prints, he said.
Nomura sees headline consumer inflation for April coming in at 6.4%, above the consensus of 6.2% and above the 6.3% recorded in March.
Citi Research economist Gina Schoeman expects April CPI to remain elevated at 6.3%.
She said while downside base effects are strong in April CPI, the higher fuel levy of 30c/litre kicks in which, alongside continued upward price pressure in the food category, offsets almost all of this.
Although she expects the Sarb to retain a hawkish rhetoric following its 100bp total rate hikes since November 2015, she believes the recently more-dovish tone of central banks in developing markets, coupled with the recent emerging markets currency rally, has reduced the inflation risk at the May MPC meeting.
"Taken against a weak GDP outlook, we believe the Sarb will pause at the May MPC meeting, keeping rates unchanged at 7.0%. After all, the March MPC meeting already had an even 3-3 split between MPC members as whether to hike or not."
Schoeman however still expects one more rate hike of 25bp at the July MPC meeting.
"Inflation risk will no doubt have heightened by that point if S&P downgrades the foreign currency rating to sub-investment grade... while at the same time this is arguably the last time the Sarb can justify a hike off an extended breach in its CPI outlook, given a 12-month minimum lag until interest rates can impact inflation, plus the fact that by mid-2017 inflation will be trending below the 6% target ceiling.
"This is not to say that we believe the Sarb will take a more dovish approach to monetary policy from H2 2016 onwards. Rather, we expect the Sarb to retain hawkish communication given that inflation expectations are likely to remain elevated and inflation risk remains alive," she said.
Montalto said their view remains that the MPC will hike to 7.5% neutral rates by September, then onwards into tight territory to 8.5% by March of next year, and then hold rates for some time until well into 2018 before cutting rates.
