Bank likely to talk tough on inflation risks
There is light at the end of the tunnel, but it will be a long time before the MPC can cut rates
THE Reserve Bank is likely to turn up the hawkish rhetoric at its monetary policy committee meeting this week, but with inflation risks fairly evenly balanced, the hiking cycle is probably at an end. Just don’t expect rate cuts any time soon.
Even though headline CPI hit 6.8% in December (against a consensus expectation of 6.6%), economists remain hopeful that consumer inflation has peaked and will fall back within the 3% to 6% target band within six months.
Less clear is whether the extent of disinflation will be sufficient to allow the bank to move from the hiking cycle of the past two years into a cutting phase. Most economists expect rates to remain on hold throughout 2017, and some through 2018 as well.
Since the recent trough of 5% in 2013, the bank has hiked the repo rate by 200 basis points in response to broadening inflationary pressures. Last year, it imposed 75 basis points of hikes, bringing the repo rate to 7%.
The Reuters consensus is that the repo rate will remain at 7% throughout 2017, with the first cut coming only in the first quarter of 2018.
Most economists expect inflation to remain relatively elevated over the next few months but then to decline due to steep base effects as food inflation slows and the effects of the drought wane.
The Reserve Bank expects CPI RISKS: Bank governor Lesetja Kganyago inflation to slow from an average of 6.4% in 2016 to average 5.8% in 2017 and 5.5% in 2018.
Stanlib chief economist Kevin Lings believes the bank has hiked enough and can afford to leave rates unchanged in the short term. It will be only too aware that South Africa’s growth outlook remains fragile while the markets remain anxious about the political environment, he says.
Ultimately, the scope for any rate cuts this year will depend on South Africa hanging onto its investment-grade credit rating and a gradual approach by the US Federal Reserve to raising interest rates.
Donald Trump’s ascension to the White House and promises of unbridled fiscal stimulus further undermine hopes that rate cuts might soon be on the cards in South Africa. Instead, as the MPC observed in November, the uncertainty over Trump’s economic policies is creating a more challenging environment for emerging markets.
Specifically, higher US long bond yields on expectations of tighter US monetary policy have caused capital outflows from emerging markets, reminiscent of reaction to the 2013 US “taper tantrum” when investors took flight from risky assets after the Fed announced it would taper off ultra-loose monetary policy.
So while the Reserve Bank CONSUMER BOON: Shoppers throng the Mall of Africa in Midrand. The Reserve Bank expects CPI inflation to slow to 5.8% this year still believes that “South Africa may be close to the end of the hiking cycle”, it has warned that its view could change should the upside risks transpire.
It is likely to restate these risks at this week’s MPC press conference. In addition to the danger of more aggressive Fed tightening, new pressures have emerged. These include the firming of oil prices in response to Opec’s recent agreement to cut output. The bank might even have to raise its inflation forecast slightly.
Nomura economist Peter Attard Montalto said markets should brace for a hawkish MPC statement on Tuesday. This will be a deliberate attempt to dampen optimism about prospective cuts and to anchor inflation expectations. In the longer term, he feared the bank’s inflation forecast would remain “sticky”, given the entrenched structural features of the economy that bid up prices and wages. In the absence of reform, the bank will have little scope to cut rates for the next two years, in his view.
“The bank cannot cut rates as long as this long-run forecast [on inflation] is not on a path towards 4.5% and certainly [not] as long as it is above 5%.”
Deutsche Bank economist Danelee Masia, however, is still looking for 50 basis points in rate cuts this year. She said the bank would have little choice because of tighter fiscal policy, weak economic growth and softer unit labour cost pressures.
This will be an attempt to dampen optimism about cuts
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