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Cape Town - The South African Reserve Bank (Sarb) is in a hiking cycle and a 25 and even 50 basis-point interest rate increase can be expected in January, Nomura emerging markets economist Peter Attard Montalto said on Thursday.
Responding to the monetary policy committee's (MPC's) decision to raise the repo rate to 6.25%, bringing the prime lending rate to 9.75%, Montalto said inflation 'fear' is clearly still top of mind for Sarb but that the market still does not fully comprehend this.
Sarb governor Lesetja Kganyago said at a media briefing on Thursday that since the previous MPC meeting, the inflation forecast has remained relatively unchanged but the risks to the forecast have increased.
"The key risks are a marked depreciation of the rand, worsening drought conditions and their likely impact on food prices, and the possibility of additional electricity tariff adjustments," said Kganyago.
READ: Pain for consumers as SA hikes rates
In his commentary about what he termed a super-hawkish hike, Montalto said "it was the upside risks and inflation ‘fear’ narrative that won out, alongside the upward revision to the core inflation forecast and the external factors".
Said Montalto: "Today’s (Thursday's) move by the Sarb brought all the usual factors together of reinforced upside risks to inflation with drought, the rand, electricity, wages and expectations, as well as the growth narrative broadly unchanged."
According to Montalto, the MPC deliberately highlighted areas where it can expect further surprises to the upside, such as the severity of the drought and its impact on consumer price inflation, as well as the fact that it only factors in 12.2% for Eskom tariff increases (Montalto puts this at 14%).
"A lot of stress is being put on wages and it is digging down with a productivity-adjusted measure that has been increasing from 4.3% to 5.1%," said Montalto.
The MPC was also more forthcoming than usual in saying that gross domestic product would take a 0.1 percentage point hit from the rate hike. "This shows, for the first time so clearly in public, that it is willing to hit GDP to deal with its inflation concerns," said Montalto. He added that this could have political consequences.
Looking ahead, Montalto said: "The path is difficult from here and highly dependent on the reaction if the FOMC (US Federal Reserve) raises rates in December."
The MPC emphasised the need to be aware of a low growth environment, hence its ability to hike only in small, gradual steps. "The first quarter (of 2016) may be an important quarter with a turnaround in core inflation coming through the end, the peak of the harvest and drought impact, as well as more clarity from (regulator) Nersa on Eskom tariffs," said Montalto.
Added to that is the start-of-year outflow shock risks as foreign investors look to reopen markets in Turkey, Brazil and even Russia, said Montalto.
On further rate hikes, he said: "Two 25 basis-points is our baseline, or even one 50 basis-point and one 25 basis-points is possible, though a little bit of a stretch. For now we pencil in a 25 basis-point hike in January, but are ready to adjust this (up or down) depending on the FOMC impact on rand markets."
Indeed, Kganyago confirmed in the question and answer session after the interest rate announcement that the MPC is still in a hiking cycle and that monetary policy is still accommodative, said Montalto.
