Analysts weigh in on next week's MPC rates decision | Fin24

Analysts weigh in on next week's MPC rates decision

Nov 16 2018 22:30
Khulekani Magubane, Fin24

All eyes will be on the South African Reserve Bank as the Monetary Policy Committee meets to make its first interest rates decision since September, when the committee opted to leave the interest rate unchanged at 10%.

In September the MPC also kept the repo rate at 6.5%. The MPC will meet on Thursday in the context of great pressure on consumer finances, including a series of fuel price hikes.

Fuel prices and the normalisation cycle of the United States are expected to be key considerations for the South African Reserve Bank's Monetary Policy Committee rates decision.

In a weekly economic forecast advisory, Investec said it noted a number of improvements had occurred, with the rand close to 4.0% stronger on a trade-weighted basis year-on-year since the last MPC meeting.

Investec’s advisory said the SARB was likely to lower its 2019 forecast due to the recent improvement in the oil price, but is unlikely to reduce its currency forecast significantly, as currencies in emerging markets remain at risk due to the US normalisation cycle.

"Markets have been volatile this year, and there is no guarantee that the oil price will continue to sink lower from current levels, with OPEC already looking to cut production in 2019 in order to combat the low-price effect of oversupply," said the Investec advisory.

The Investec advisory said the Reserve Bank was likely to scrutinise consumer price index data for October, set to be released on Wednesday, for any evidence of embedded upwards price pressure from previous rand weakness. 

"Key for the MPC is also the upward trajectory of many interest rates globally, notably in the US, and the impact this has on inflation via rand weakness, with the US signalling further hikes in 2019, and SA at risk of additional portfolio outflows," said Investec.

In its own advisory, FNB Securities said key concerns for the domestic inflation profile would be the pace of Fed monetary policy tightening, with the next hike in the US expected in December.

"The SARB may well decide to get ahead of the Fed’s rate hike with one of their own. The arguments against a hike, however, are equally compelling given the recent currency gains, oil price declines and the exceptionally weak growth environment," it said.

FNB Securities said it believed the accumulation of fuel price hikes in the preceding months left consumers far more sceptical, because of currency and oil price volatility in recent months.

"We expect to see some relief for consumers in the final quarter of the year, as hefty fuel price cuts and decent real wage growth ease strained household finances. That said, we caution that a likely interest rate increase of 25 bases points next week could blunt much of the support," said the advisory.

Judging by September numbers for mining, manufacturing and retail sales, third quarter gross domestic product would rebound by approximately 2.7% quarter-on-quarter, seasonally adjusted and annualised, but this would not have an impact on full-year forecast for growth of just 0.7%, the advisory added.

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