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Sarb rates call: The devil will be in the detail

Sep 20 2016 20:14
Carin Smith

Cape Town - There are likely to be no interest rate cuts until the end of 2018, which is the end of the SA Reserve Bank (Sarb) forecast horizon. Rather expect two more rate hikes of 25 basis points each - one in November and one in March - over this period.

This is the view expressed on Tuesday by emerging markets economist Peter Attard Montalto of Nomura.

"Such moves will likely be data dependent and ‘last minute’ in nature," he said.

When Sarb's Monetary Policy Committee (MPC) announces its latest rates decision on Thursday, Montalto expects what he describes as an overall neutral stance - like at the previous MPC meeting - yet one that will confirm that a rate hiking cycle continues.

Nedbank’s Corporate and Investment Banking unit is of the same view. The unit estimates that there is a 70% probability of a hold in interest rate hikes at this week's MPC meeting.

Based on an analysis the unit did, it expects Sarb to revise its CPI profile lower, taking into account the recent rand strength. Just like Montalto, Nedbank also believes the Sarb is likely to reiterate that this is a pause in a hiking cycle.

READ: Sarb likely to pause rate hike cycle

"While we expect rates to remain unchanged at Thursday’s MPC meeting, in line with market and survey expectations, upward revisions to growth and probably only minor changes to the Consumer Price Index (CPI) inflation outlook will provide an opportunity for some communication ‘reinforcements’ against cut expectations in particular," said Montalto.

In his view, the MPC still believes in risks to the rand from the political and ratings situation, as well as the upside risks to neutral real rates from ratings risk and external issues like Fed hikes, US elections and China.

"It is for these reasons that the MPC is likely to reinforce that we are in a hiking cycle still," said Montalto.
He pointed out that the MPC has kept rates on hold since March in a hiking cycle that has been ongoing for two and a half years. He, however, disagrees with the view by some that it could be the end of the hiking cycle and that rate cuts could come rapidly.

"This is an incredibly drawn out and shallow cycle certainly – thanks in part to the fall in local real rates, driven in turn by global real rates," explained Montalto.

"In such a drawn out cycle, the market is increasingly struggling to see the point or indeed the end point."

Montalto said the Nomura view on the rate cycle is based on the "style" of the cycle against the backdrop of SA's low growth economy with its lack of demand-side effects where inflation fears are the key driver.

"The MPC still believes we are in a world where the output gap is small given that most of the low growth we are seeing is the result of structural factors, not cyclical ones," said Montalto.

"As a result, it is still on the accommodative side of neutral rates and are both happy sitting there in a low growth environment, but also in saying that such accommodation could be removed in such a situation, as more inflation second-round effect risk presents itself...the ‘fear’ remains and with it the bias to hike."

Montalto sees the CPI forecast only marginally changed and said that, while Sarb has been marginally surprised to the downside in the last two CPI prints, he does not think it is significant.

ALSO READ: Sarb to revise SA growth forecast

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