Interest rate to stay the same
THE Reserve Bank’s monetary policy committee (MPC) will have a lot to discuss when it meets this week, but the interest-rate decision it announces on Thursday is likely to be the same as after the last five meetings: unchanged.
Although a lot of new economic data has been published since the MPC’s last meeting in May, the committee will still have to navigate its policy decision through a landscape of slow growth and expectations of high inflation.
Mohammed Nalla, head of strategic research at Nedbank Capital, said most of the factors the MPC would consider remained the same as at the time of the last meeting.
Inflation according to the consumer price index (CPI) came down slightly from 5.9% in April to 5.6% in May, the most recent figure published by Stats SA.
The dismal first quarter GDP data, which included a 0.9% contraction in the economy, was only published a week after the MPC’s last meeting. But recent manufacturing and mining data show the second quarter’s GDP figure should improve.
What has deteriorated is the Brent crude oil price, which increased by 3.73%, and the rand’s exchange rate, which weakened
The rate hiking cycle is only likely to start in 2015, in unison with the US
by 5.14% from R9.52/$ to R10.03/$. Both represent an upside risk to inflation, although Reserve Bank governor Gill Marcus indicated in her last few public addresses that the followthrough effect of the weaker rand to inflation was muted in an environment of slow growth, Nalla said.
Ilke van Zyl, economist at Vunani Securities, said despite the recent favourable inflation outcome, the 84c increase in the petrol price in July and another expected increase in August could take inflation to a peak of 6.3% next month.
At its May meeting, the MPC lowered its inflation expectation to a peak of 6.1% in the third quarter, down from 6.3%. This could be adjusted upwards.
“That is what I would have focused on, but with the Reserve Bank’s thinking methodology, growth would also be an important consideration,” Van Zyl said.
In May, the Reserve Bank cut its growth forecast for the year from 2.7% to 2.4%. At last month’s monetary policy forum, Marcus hinted that the forecast would be cut again at this week’s MPC meeting.
The IMF cut its 2013 growth forecast for South Africa this week — from 2.8% to 2%.
The Reserve Bank has always been adamant that its core mandate is price stability — to keep inflation within a 3%-6% target range.
Marcus said in a speech at the end of last month that the upside risks to the inflation outlook make further interest-rate accommodation difficult, but did not automatically imply a tightening of the monetary policy stance.
Van Zyl said she expected the international economy would be even more prominent on the MPC’s agenda this week than in May. The question of when the US Federal Reserve would start tapering down its quantitative easing came up again this week after the publication of the Fed’s June minutes.
Marcus said last month there was a danger that South Africa could be behind the curve and leave the start of its interestrate increase cycle too late.
“But at the same time the downside risks to growth imply that we would not want to be unnecessarily pre-emptive,” she said.
Thabi Leoka, head of macroeconomic research at Standard Bank, said because there were two big factors working against each other — slow growth and higher inflation expectations — the Reserve Bank would most likely keep rates on hold until it was clear whether the rand stayed at its current level or would weaken further, and what the pass-through effect will be.
The last time the MPC adjusted interest rates was after its meeting in July last year, which brought the repo rate down to 5%, with the prime interest rate at 8.5%. Rates could stay at these levels for at least another year.
Van Zyl said she expected rates to stay unchanged until the last quarter of next year, and then go up by 50 basis points.
The risks to growth imply that we would not want to be unnecessarily pre-emptive
Nalla expects the first rate increase to come in the second or third quarter of 2014, unless inflation accelerated considerably above the target band.
Nedbank’s group economic unit said given the weak mining and manufacturing data and the effect it would have on growth while inflationary pressures were rising, the MPC was likely to keep interest rates unchanged well into next year.
Leoka said a 50-basis-point rate cut was possible by the second quarter of next year to stimulate growth, if inflation pressure had moderated. The rate-hiking cycle would then only be likely to start in 2015, in unison with the US, she said.