Bank likely to keep tightening screws

The focus will be on the annual meeting of African Development Bank (AfDB) in Sharm el-Sheikh, Egypt, and the meeting of the Reserve Bank’s monetary policy committee (MPC), which will be followed by its interest rate announcement on Thursday.

Stats SA will release the consumer inflation rate for April on Wednesday.

AfDB annual meetings attract about 3,000 participants, including finance ministers and economists from around the world, entrepreneurs, pension and private equity fund managers and financiers. This year’s theme is “mobilising private sector financing for climate and green growth in Africa”.

AfDB president Akinwumi Adesina said Africa’s finance ministers will share their experiences on galvanising private financing domestically and internationally.

On Tuesday, the Reserve Bank’s MPC starts its third meeting of the year. The MPC surprised in March with a narrow three-two vote to raise the repo rate by 50 basis points (bps) instead of the widely expected 25 bps.

Absa senior economist Miyelani Maluleke said at the time that the overall tenor of the MPC and subsequent questionand-answer session was “uncompromising” on the need for tough action to contain inflation as the MPC maintained its gloomy view on the country’s growth prospects.

“Since then, the rand has weakened significantly more than expected, and this represents a strong materialisation of a key upside risk to interest rates that we flagged in our forecast writeup,” said Maluleke.

“The Bank stated clearly at the March MPC meeting and its recent monetary policy forum that the priority for monetary policy currently is to bring inflation and inflation expectations down sooner rather than later,” he said.

Maluleke said that Bank governor Lesetja Kganyago has stressed that allowing inflation and inflation expectations to settle at higher levels will require a costlier policy adjustment in the future.

Reserve Bank deputy governor Kuben Naidoo also recently discussed risks to monetary policy, saying the exchange rate and loadshedding are two risks that may result in the MPC taking “further steps to bring inflation down”.

In this context, “we believe that the MPC will respond to the big exchange rate weakening with more tightening”, said Maluleke.

“We now expect the Bank to hike the repo rate by 50 bps at the May MPC meeting,” he said.

Investec’s Lara Hodes said that Investec also expected the MPC to hike rates by 50 bps.

Hodes said headline consumer inflation “is proving to be sticky”, while the rand has notably depreciated, probably “prompting the Bank to revise its rand starting point compared to the previous MPC meeting”.

FNB chief economist Mamello Matikinca-Ngwenya said the question, “or fear”, is whether the MPC will extend the hiking cycle.

“While we hold the view that the MPC has cause to pause, having hiked by a cumulative 425 bps to date, there is a high probability that another 25-50 bps will be implemented,” said Matikinca-Ngwenya.

“This would bring the repo rate to 8.25%, the highest level since early 2009 when the interest rate was 9.5%.”

On Wednesday, data on consumer inflation for April will be published.

Headline inflation edged up to 7.1% on an annual basis in March, from 7% in February. Core inflation was flat at 5.2% but had monthly pressure of 0.8%. FNB said it expects headline inflation of 7% year on year in April, while Investec expects inflation of 6.9%.

Other economic numbers coming out this week are the leading business cycle indicator on Tuesday and data on producer inflation for April on Thursday.