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Why SA rates may stay on hold

Sep 22 2015 06:54
Carin Smith

Cape Town - The SA Reserve Bank (Sarb) is likely to keep the repo rate unchanged at 6% when its Monetary Policy Committee (MPC) meets on Wednesday, according to international market research company Citi Velocity.

This is because the US Federal Reserve decided not to raise its rates last week.

"We believe that growth concerns will come to the fore in the MPC statement. The MPC’s argument for not raising rates further is likely to be that forex moves are largely being countered by the lower oil price, there is weak domestic demand, the gross domestic product (GDP) outlook is significantly weaker and this is compounded by large downward revisions to our global GDP growth outlook," Citi Velocity said in a statement.

"A wild card is the third quarter BER Inflation Expectations survey which will be released at the same time as the MPC statement."

READ: Further rand weakness not all bad - Sarb governor

Emerging markets analyst Peter Attard Montalto of Nomura agrees that there will likely not be a hike this time, although he emphasises that the MPC remains in a "broad hiking cycle". He thinks is it marginally more likely that the MPC will keep rates unchanged, but will not be surprised if the MPC did decide to hike this time round.

"We, however, think things are very finely balanced. We think it will come down to the Sarb governor and a desire to be at, not ahead of, the curve’, and the desire to hike as little as possible," explained Montalto.

"We can see two possible votes for a hike from the two hawks, and two clear votes for unchanged from the doves. However, the deciding vote of the governor is in play here. Our original forecast had been that there was around a 60% chance of a hike at this meeting because of the move in the currency."

However, Montalto said Nomura is now "sitting on the fence" and sees a marginally stronger likelihood of rates unchanged with a hawkish statement and a degree of a type of "pre-commitment" on a November change.

He said the latest Consumer Price Index (CPI) will be announced on the same day as the MPC meeting this week and in his view it is likely to go down from the previous 5% to 4.7% and core inflation unchanged at 5.6%. He reckons the MPC would want to hike interest rates as little as possible because of weak growth and "wanting to hold inflation expectations in check".

In Montalto's view the factors for a hike would include the rand/dollar performance.

"There has been currency weakness without major portfolio outflows by foreigners, and we think the MPC will ask itself where rand/dollar rate could be with portfolio outflows," said Montalto.

The difficult wage rounds expected in the gold industry, somewhat higher oil prices and food inflation are other factors, he said.

READ: Sarb increases repo rate by 25 basis points - what it means

On the other hand, factors he said which would likely lead to an unchanged rate, include the current account deficit that "has meaningfully surprised to the downside". In his view the MPC will likely view this as a positive and as providing "room to pause".

Unit labour costs have also "surprised to the downside" for another quarter in the second quarter, showing that "wage/inflation spiral risks remain a forward-looking concern rather than a current threat". Other factors which could halt a rate hike this time include the "breathing room" the CPI figures could possibly offer and the second quarter growth numbers that show very weak domestic demand.

Nedbank economist Mohammed Nalla also expects the Sarb to keep the repo rate unchanged on Wednesday.

"The July hike of 25 basis points was against our expectations, but given the US Federal Reserve holding back on a hike at this stage, the Sarb would have some scope, considering the earlier Sarb hike, to stay on hold for now," he said.

He however warned that domestic demand and supply data have continued to deteriorate, while exogenous factors will likely continue to push domestic inflation higher into the end of the year, effectively entrenching the stagflation dilemma.

ALSO READ: US Fed, not CPI to impact Sarb rate decision

us federal reserve  |  sarb  |  interest rate  |  sa economy


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