Not all econ­o­mists rule out chance of in­ter­est rate hike

The Star Early Edition - - BUSINESS REPORT - Wise­man Khuzwayo

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.”

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