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Surprising CPI level won’t stop rate hike - Nomura

Jul 23 2015 11:33

Cape Town – While the Consumer Price Index (CPI) surprised analysts with its lower-than-expected increase, the SA Reserve Bank will still increase the interest rate hike on Thursday, according to a research analyst.

The headline CPI annual inflation rate in June 2015 was 4.7%, Stats SA has announced on Wednesday. "This rate was 0.1 of a percentage point higher than the corresponding annual rate of 4.6% in May 2015," according to Stats SA.

READ: June's CPI inflation rate up to 4.7% - Stats SA

Nomura research analyst Peter Attard Montalto told Fin24 that the CPI “surprised quite strongly to the downside”, compared to expectations of a 5% CPI rate. “Our year average forecast falls to 4.9% for this year from 5.2% and to 6.3% for next year from 6.5%,” he said.

CPI won’t derail hike

“This should not derail a hike (on Thursday), though we think the probability at the margin probably shifts a little lower,” he said. “The Sarb can still justify a hike based on Fed pricing and medium-run CPI risks. We believe it would be loath to be seen as backward-looking on CPI.”   

“We think the Sarb may still hike (on Thursday),” he said. “Put another way, it would still be very easy for the Sarb to justify a hike on other factors such as market Fed pricing.”

Montalto said it would be a close call, “particularly given that it basically comes down to just the governor’s vote either way. This reinforces that view.”

“However, we think the Sarb, and particularly the governor (Lesetja Kganyago), would be loath to be seen as backward-looking on past CPI,” he said. “We expect they will want to keep the markets and their own decisions looking forward very much through to the end of the forecast horizon and the skew in CPI risks they see out that far which would be broadly unchanged.”

Backtracking from hawkish MPC statement

“It could technically be possible to backtrack on last month’s very hawkish MPC statement after this CPI data, but the risks to credibility and the much more important long-run framework the MPC has been carefully building around its strategy would make such a move highly risky and susceptible to market backlash, especially if there were to be a September Fed hike.

“As such, we think a hike (on Thursday) could still occur but that the statement would not want to signal any type of pause given the Fed lift-off to come, but instead talk about dependency on data and market reaction (ie flow).

“Put simply, the Sarb would want the market to keep thinking a cycle is ongoing but it may be happy to shift expectations of pace, not endpoint or commitment to a normalisation cycle itself.”

sarb  |  nomura
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