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Why impatient doves will vote for a rate cut - analyst

Sep 16 2017 11:00
Lameez Omarjee

Johannesburg – Dovish members of the South African Reserve Bank's (SARB's) monetary policy committee (MPC) may be “tired” of waiting for risk events and vote for a rate cut of 25 basis points at their next meeting, according to Nomura emerging markets economist Peter Attard Montalto.

He highlighted a number of reasons that may support a rate cut in a report on Thursday.

The previous cut in July came about as a result of the weak economic environment and inflation forecasts which had come down, Montalto explained.

This time around, dovish members may have grown tired of waiting, he suggested. “The doves have become tired of waiting for risk events such as ratings and politics that are working out over a long time horizon while markets remain benign, while the hawks still hold deep-seated concerns about these events and see no point in cutting now only to hike later or take risks.”

The reasons supporting a rate cut include:

1. Inflows to emerging markets are expected to continue and the Federal Reserve Bank’s tightening has been well priced

Fed policy being “drawn out and shallow”, doves may not view Fed hikes as a significant threat. “We think the doves may be underplaying the risks of the ECB [European Central Bank], however. They view China as a more serious risk to be concerned about,” he said.

2. Ratings have been priced in, to a degree

There are a wide range of opinions on the impact SA’s exit from the World Government Bond Index (WGBI) will have on markets. “Low pass-through here is a key component of the argument, as well as the fact any shock sell-off after WGBI exit may well be reversed.”

3. Doves do not have a dovish/low view on inflation

It appears the doves may consider inflation to be under control given forecasts, but there may still be concerns about the level of inflation in the long term which may be sub-optimal, he said. “They also still expect food price inflation to be sticky.”

4. Consider growth

With inflation being under control, growth is being considered more “actively”, explained vIn a report on Thursday h. “We don’t think they see a particularly large output gap, and think the vast majority of low growth is still structural.” Given inflation and despite the risk outlook, the doves may still want to act.

Introducing further cuts, specifically a cycle of 100 basis points, could only marginally impact growth by 0.4 and 0.5 percentage points for the next two years. “That seems small versus the output gap and given the risks and uncertainty, especially if we consider that the growth environment is hardly likely to be jobs intensive.”

Although the impact of rate cuts may be small, this may be “better” than doing nothing, said

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