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Cape Town - Chances are that the SA Reserve Bank (Sarb) will leave interest rates unchanged at the next Monetary Policy Committee (MPC) meeting on Thursday, according to Dawie Roodt, director and chief economist of the Efficient Group.
"Increasing interest rates while inflation is still well within the targeted range will be a difficult sell. Furthermore, the economy is clearly battling to grow and a rate increase now will probably be opposed by most if not all members of the MPC," Roodt told Fin24 on Monday.
"Lastly, the Sarb is likely to start with the local hiking cycle only after the Americans have started tightening or when it becomes clear that a Fed increase is imminent."
Global foreign exchange house Citi also thinks there will be no rates hike by Sarb on Thursday
"We expect an unchanged repo rate, but a more hawkish Sarb. It is possible that the MPC moves to a two quarter long temporary breach in its inflation outlook but, weak GDP growth is a strong offset that befits the Sarb’s preference not to front-run the Fed," Citi said in a statement.
"The risk of a rate hike grows through the second half of 2015, however, and the key events in this regard are the electricity tariff decision on June 29, the gold wage negotiations underway and the state of the rand."
READ: Sarb governor keeps interest rate the same
Small hike
Rob Price of ETM Analytics told Fin24 data would indicate there is a 40% chance of Sarb announcing a 25 basis points hike at this week's MPC meeting.
"This is not an insignificant rate hike risk this week, but certainly not the base line view which remains for a flat decision, he explained.
He said there has been a strong recovery in global inflation expectations over the past month on the back of a sharp recovery in the price of Brent Crude and an uptick in European economic growth expectations, which has resulted in a marked recovery in the Sarb rate expectations ahead of this week’s MPC.
The US 10-year breakeven rate has recovered to 1.86% from 2015 lows of 1.53%, while the SA equivalent has recovered to 6.53% from 2015 lows of 5.23%.
"There is a school of thought that the Sarb might pre-emptively hike interest rates due to the looming inflation risks and a fragile rand. While the Sarb has underplayed the fragility of the rand, it is clearly concerned with the possible impact of an eventual rate hike by the US Fed.
This could likely cause another sucking sound from the emerging markets regions as capital flows back towards the US and forces emerging market rates higher across the board," said Price.
"While this argument for pre-emptive Sarb rate hikes is compelling, it discounts the overwhelming dovish and reactive nature in which the Sarb has conducted monetary policy over recent years."
Price said the Sarb believes that low or even negative real interest rates are required in order to support economic growth. In this regard, the recent moderation in CPI inflation caused a notable rise in the real interest rate from -0.7% in August 2014 to 1.8% in March - the highest levels since February 2011.
"It should also be reiterated that rising SA inflation expectations will only begin to impact SA CPI in earnest later in 2015. Bloomberg consensus expects CPI to jump to 4.6% year-on-year in April from 4% y-o-y and, while this is a notable rise in inflation, CPI will remain well within the Sarb’s target range and keep real interest rates positive," said Price.
"As such the bias is tilted towards another hawkish statement from the Sarb this week, as it attempts to maintain credibility, but no actual hikes."
Watch the wording
Mike Schussler of Economists dotcoza told Fin24 there should be no change in the rate right now, but he suspects that the stance or wording will change to reflect that rates are going to go up in the near future.
"This is going to be a hard time for all in SA as growth is weak largely due to power cuts and electricity price increases and low commodity prices for our exports. But we have to fight to keep inflation low as the price of too high inflation can lead to social unrest," cautioned Schussler.
"We cannot afford both high inflation and high unemployment. The country has done as much as it could to lower rates, but growth remains weak. Savers have not been getting their fair share either and too many people are now in higher risk savings. That will have a large negative impact when equity and bond markets turn as they surely must sooner rather than later."
In his view SA as a country has other things to clear up.
"We need to reduce red tape – including BBBEE laws that are taxing white job creators. We must get infrastructure back to world standards, stop corruption by making public the fight against it and arresting those who are corrupt and cut the civil service wage bill as it forms a big tax on all in the country with a small tax base," said Schussler.
"Service delivery needs to get into gear and the case of implementation of a more business friendly environment needs to be made and implemented."
These things will help growth more than cuts to interest rates om his view.
"We need real things to happen or we will again be stuck on the low growth road," he warned.
Owen Nkomo of Inkunzi Investments agrees with Schussler that the MPC will keep the rates unchanged this Thursday.
"Not much has changed and the rest of the world is cutting rates," he told Fin24.
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