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Cape Town - After hiking the repo rate by 25 basis points (bps) to 7% on Thursday, the SA Reserve Bank (Sarb) may very well "pause" at the next monetary policy committee (MPC) meeting in May but then increase the interest rate by 50bps in July, Peter Attard Montalto, emerging markets economist at Nomura, said on Thursday.
"We think a 50bps hike is then possible in July with upside surprises possible to the consumer price Index (CPI) forecast by then and a much stronger food price and forex pass-through impact becoming evident," explained Montalto.
"There will also be more evidence by then of how the wage round is going. Overall, however, we think the 'see-saw' remains the same – inflation fears increasing and outweighing lower Sarb growth expectations."
Montalto then sees a 50bps move in the fourth quarter of 2016 and in the first quarter of 2017, which would take the repo rate to 8.50%, "keeping real rates positive to anchor inflation in the long run through a difficult and turbulent period".
He emphasised the Sarb confirmed at the post-MPC press conference that it is indeed still in a hiking cycle as a broad framework. It seems MPC members simply disagree over the timing of hikes.
"However, much stress was put on the data-dependence of the outlook for the pace of hikes to come and how the forecast and driving factors would be volatile in this environment," said Montalto.
"This suggests to us, despite this move coming hot on the heels of the last, that the MPC is in a slow measured cycle, moving where it needs to rather than trying to get significantly ahead of the curve."
READ: MPC hikes repo rate amid 'tightening cycle'
In his view, fear is still the key driver of the cycle, with a focus on the skew in risks on food prices, the rand and into wages, expectations and inflation.
"There was also specific mention of the increased pass-through now possibly evident in the latest CPI data. The broad skew in risks suggests the MPC still wants to remove accommodation in policy," he said.
In reaction to the latest Sarb rate hike, international market research company Citi Velocity reiterated its view that inflation has the ability to hurt the SA economy more than a gradual hiking cycle.
"The latest hike buys the Sarb more credibility. This is critical at a time when the economy faces a less than 50% probability of a foreign currency rating downgrade to sub-IG, in our view, as it compensates somewhat for weaker institutional strength at the Finance Ministry, even if that is only because of politics," Citi Velocity explained in a statement.
Sanisha Packirisamy, economist at MMI, pointed out that while growth forecasts have moderated, the Sarb noted that constraints facing the economy are largely structural in nature and cannot be solved by monetary policy alone.
"In the Q&A session, one of the MPC members argued that monetary policy is still 'very accommodative' and as such we expect a further two interest rate increases (of 25bps each) over the course of the next twelve months, which will likely leave real rates at a level marginally above 1%," she said.
"Higher nominal interest rates remain key in an increasingly challenging capital flows and subdued terms-of-trade environment. The MPC acknowledged the slow adjustment in the current account deficit despite a meaningful depreciation in the exchange rate over the past year and expressed concerns over the extent of net portfolio bond and equity outflows since the January meeting."
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