Data due out will affect speed of rate hikes

NEXT week’s money supply and private sector credit extension (PSCE) data are expected to give further guidance on whether the Reserve Bank’s monetary policy committee will hike rates at its next meeting on July 15 to 17.

The Bank has made it clear the economy is in a rate-hiking cycle, but the extent and speed will depend on data.

Last month’s data will be released today and economists are not predicting much of a change from April. Those data showed the annual growth in broad money supply (M3) fell to 7% from 7.9% in March, slightly worse than the market forecast of 7.2%.

PSCE growth fell to an annual 8.3% from 8.7% in March, worse than the consensus forecast of 8.6%. Underlying credit demand is likely to still be subdued in the months ahead, held back by weak consumer and business confidence, and tight lending standards and high household debt, Nedbank’s economic team said in a note.

The rise in the consumer price index (CPI) to 6.6% last month from 6.1% in April has heightened predictions that the Bank will hike rates next month. More so after comments by Bank deputy governor Daniel Mminele last week that the rising interest rate cycle would “normalise in due course”.

But some economic indicators last week may alleviate some of the pressure on the Bank. The producer price index dipped to 8.7% last month amid concerns by economists it could spike above 9%.

The other positive data relate to the inflation expectation survey by the Bureau for Economic Research that showed that expectations remain stable despite CPI spiking above 6% in April. In the past, inflation expectations usually rose when inflation remained outside the target band.

The Bank has said it is closely watching expectations that might prompt it to hike rates if the 6% level on expectations is breached on a sustainable basis. But in this regard the data show no problem yet. After hiking rates in January by 50 basis points, the Bank has kept rates unchanged at two subsequent meetings. Economists still remain divided on whether or when rates will be hiked next month.

Barclays Research says it believes the Bank when it says a gradual, modest, data-dependent hiking cycle is in store. But it does not foresee a hike in July. “We forecast another 50 basis points hike in September, but see a risk of a 25 basis point hike at both the Septem- ber and November meetings.”

In contrast analysts at Rand Merchant Bank say the more recent hawkish comments from the Bank signal that a rate hike is imminent.

“Hence, we have still pencilled in a 50 basis point increment in July, but admit the Bank could opt to move by only 25 basis points given the uncertain growth outlook.”

Investec economist Annabel Bishop expects only one further interest rate hike this year, of 25 basis points in the fourth quarter.

Other economic data scheduled for release this week include this month’s Kagiso purchasing managers’ index (PMI) and national vehicles sales. The PMI fell to 44.3 index points last month from 47.4 in April, mainly indicating lower business activity. Economists do not expect much of an improvement for this month, but some recovery could happen after the end of the platinum mining strike.

Vehicle sales were dismal last month, with 49,465 units sold, 9.2% lower from a year ago. The number of holiday days was partly to blame, but no big recovery is forecast. The National Association of Automobile Manufacturers of SA projects a decline in new vehicle sales of 3.5%-5% this year.