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Johannesburg - Expect the Monetary Policy Committee (MPC) of the SA Reserve Bank (Sarb) to keep rates unchanged at 5.75% on Thursday, according to Nomura emerging markets expert Peter Attard Montalto.
"We see a 40% chance of a 25 basis point hike. The first press conference of the new governor Lesetja Kganyago should prove an interesting exposition for the market of his style and leadership– as well as monetary policy views – though we still think continuity is king," said Nomura.
"We still see rates remaining unchanged at this time. Given the recent global growth trends, benign SA domestic growth numbers, a fall in domestic inflation, but still hefty MPC concerns over the medium run about CPI upside risks, as well as what oil is doing, we think the MPC would consider a hike this week to be ahead of the curve."
Such a move would be a shift from what the MPC has been doing until now, namely maintaining the current level of real rates, but not wanting to normalise them too early given the domestic growth situation and uncertainty around the timing of the Federal Reserve’s own normalisation process.
In Nomura's view, there are simply not enough alarm bells at the moment for an immediate hike.
"Remember, this is a two-stage cycle – fine-tuning between growth and inflation until there is more evidence that the Fed is about to hike," said Montalto.
"However, the MPC’s continued concerns about medium-run inflation and core inflation especially mean we cannot dismiss the possibility of a hike of 25 basis points."
Part of this risk emerges from the view that, while growth forecasts should remain pretty static at this meeting for the current year and headline inflation forecasts should fall meaningfully on pencilling in lower and then pretty flat oil price assumptions, core forecasts should actually remain high and sticky, in Montalto's view.
Nomura thinks the focus on core over headline and the fact that there has been "a shift from a soft-dove to a soft-hawk governor" is key to the risk.
"It would come down to whether the new governor is happy only being ahead of the curve, but also making that clear right at the start of his term. On top of this, a view that the output gap is much smaller than many people think and a view of the mini budget as not constraining the room to hike, but instead adding to wage/inflation risks all lead to our relatively high probability of a hike," said Montalto.
The MPC will be one member down at this meeting, given the departure of Gill Marcus and no replacement deputy governor yet appointed. Hence any tied vote, with six members, would require the governor’s deciding vote.
"We think the MPC, while keeping rates unchanged, will try to stress the idea of a much smaller output gap to try to keep the markets onside and convinced that they are still in a hiking cycle, and can hike next year even with such low growth assumptions," said Montalto.
"In addition, we think the MPC will resist the idea of headline being key in such a low oil price environment and focus on the risk around the public sector wage round next year."
