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Cape Town - The SA Reserve Bank (Sarb) is attempting to keep a tight rein on market expectations, according to emerging market economist Peter Attard Montalto of Nomura.
"While the markets are currently not pricing in rate cuts and consensus expectations still see one more 25 basis points hike, the direction of travel has been towards rate cuts," he said.
He cautions, however, that the mantra of Sarb's Monetary Policy Committee (MPC) is not “cut wherever and whenever possible”, but rahter “pause if you can”.
"The MPC, in our view, believes in neutral rates of around 7.50% with policy, therefore, still in accommodative territory and real rates low. It views this in ‘level terms’ – that is it thinks about where it is in relation to neutral and the effect it has (or indeed not) on the economy," said Montalto.
"We believe it does not think about directionality in the sense of shifting on a strong rand to thinking it has to cut."
In his view, recent Sarb rhetoric has confirmed this. The Sarb has highlighted that short-term inflation risks are looking positive (lower) on oil and especially the rand, but its longer-term "fear" of inflation upside risks is still there beyond the third quarter of 2017.
"Added to the view of the long lags from the effects of rates changing it is (softly) signalling the next move is not a cut, but possibly a hike. The MPC arguably could be clearer still – or rather blunter on this, but we think if markets listened carefully to what is being said they would pick up on the signals provided," said Montalto.
"Overall, our message remains the same to the market – listen to what the Sarb is saying. But maybe there also needs to be some reassessment of what the market thinks the operating bias is – that is it is not just the minimisation of rates."
In July Sarb governor Lesetja Kganyago announced that the MPC has decided to keep the repo rate unchanged at 7%. At the time Sizwe Nxedlana, chief economist at FNB, said this was in line with the market and the banks expectations.
"The South African economy is undergoing a protracted period of weak growth. This is partly due to exceptionally weak growth in domestic spending that is likely to continue because of ongoing government belt-tightening, low growth in credit extension to households, low consumer confidence and the impact of previous interest hikes," explained Nxedlana.
Stanlib chief economist Kevin Lings said in reaction to the last MPC decision that Sarb can afford to hold rates steady in the near-term, while it assesses a range of factors.
In his view, Sarb will also be mindful of the ongoing risk of a credit rating downgrade in December, which may require a policy response.
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