Not all economists rule out chance of interest rate hike

NEWLY minted Reserve Bank governor Lesetja Kganyago kicks off his first three-day meeting of the monetary policy committee (MPC) today, facing the unenviable task of having to balance the need to give the economy some breathing space by keeping interest rates steady and the need to keep inflation at bay.

Consensus forecasts are that the MPC will keep interest rates on hold as consumer inflation is expected to remain unchanged at 5.9 percent, thanks in part to the rand’s strength against the dollar.

Statistics SA will release the October data of the consumer price index (CPI), a measure of inflation, tomorrow.

Economists say a decline in petrol prices and food inflation were the main contributors to the CPI inflation rate dropping to 5.9 percent in September from 6.4 percent in August.

This is within the bank’s inflation target range of 3 percent to 6 percent. But not all economists have ruled out the outside chance of a 25 basis point hike, especially if Kganyago feels pressed to burnish his anti-inflation credentials and show the markets that he means business.

Nedbank said: “We expect inflation for October to slow marginally to 5.8 percent from 5.9 percent in September and our view is that the rand’s continued volatility and vulnerability will convince the MPC to push another 25 basis points this week.”

The rand was bid at R11.1199 against the dollar at 5pm yesterday. The local currency has bounced back by about 2 percent from a brief slide that took it as low as R11.31 against the greenback in the wake of Moody’s Investors Service downgrade of South Africa’s sovereign credit rating on November 6.

Surprisingly strong US economic data and a push for fresh stimulus in Japan has provided support to the dollar.

But Kamilla Kaplan, an economist at Investec, said the nominal trade-weighted rand was 3.3 percent weaker at current levels on a year-on-year basis compared with the time of the September MPC meeting.

“The rand has strengthened against the euro and the British pound, while against the dollar the rand is little changed since the last MPC. These currency dynamics do not argue for an interest hike,” she said.

Alex Smith, an economist at FNB, said he expected the repo rate to be left on hold on Thursday, with inflation likely to remain below 6 percent over the short term. “The only risk to this outlook is the rand exchange rate. Further weakness against the US dollar this week could prompt the SARB [Reserve Bank] to hike rates by 25 basis points.”

He said a hike was unlikely, however, because the rand had been relatively stable against the other major currencies.

Signs of recovery were recorded last week in manufacturing, retail and mining data. However, the Reserve Bank has consistently said that the domestic economy is in a rising interest-rate cycle. But the US Federal Reserve Bank is unlikely to start hiking rates before June.

Mamello Matikinca, an economic analyst at Rand Merchant Bank, said while the inflation profile might be improving, the weak rand exchange rate still posed an upside risk. “We expect headline CPI inflation to have stabilised at 5.9 percent and core inflation by 5.6 percent. Prices should have risen by 0.2 percent during the month, driven by higher food and beverage prices.

“However, petrol price cuts should have limited the rise.”

Matikinca said risks of inflation breaching the top end of Reserve Bank’s target range persisted. The continued rise in core inflation and the potential for higher gross domestic product growth revisions expected next week should be enough to justify a rate hike.

“Also, communication by the new governor Lesetja Kganyago has… been very hawkish. As such, we expect the SARB to hike the rates by 25 basis points. This is against the consensus view of no hike. We expect the hike to be accompanied by a neutral MPC statement, which should allow the SARB to keep rates on hold for some time.”