Ethel Hazelhurst
Economists and the money market see no early hike in the Reserve Bank’s repo rate, despite recent rand weakness and the increasing chance that inflation will top the ceiling of the bank’s 3 percent to 6 percent target range.
The currency hit a worst level yesterday of R9.2559, as risk aversion rose globally on events in Cyprus.
Bloomberg reported that a levy on the island’s bank savings threatened to throw Europe back into crisis.
Domestic factors are also at work. Nomura analyst Peter Attard Montalto said his earlier forecast of R9.25 for the rand by mid-year had already been met.
“Our original view was that resurgent labour strikes and protest action, likely spilling into violence, would occur in quarter two as a result of the wage round at that time, and also especially the mining sector reorganisation and retrenchments, which would begin and in turn prompt more labour unrest. This is all still to come and hence our view of weakness is still intact.”
Since the last meeting of the Reserve Bank’s monetary policy committee (MPC), on January 24, when it forecast inflation would peak at 6.1 percent in the third quarter, the rand has weakened from R9 to the dollar to more than R9.20.
Although this implies a higher peak for inflation, there are few expectations the rate will rise after the MPC wraps up its latest meeting tomorrow.
In fact, the market was still pricing in a 7 percent to 11 percent chance of a cut in the next three to six months, Nedbank Capital head of strategic research Mohammed Nalla said.
And it saw a rate hike only much further down the line, with forward rate agreements betting on a 63 percent probability of an upward adjustment in 18 months time, Nalla added.
Economists were making a similar call yesterday.
The repo rate was cut unexpectedly to 5 percent last July because the chances of growth had receded, and the outlook has since worsened.
At the January MPC meeting, the bank’s growth forecast for this year was revised down to 2.6 percent from 2.9 percent previously. The poor outlook was confirmed by recent figures for January retail sales growth: 1.9 percent year on year in real terms, well below expectations of 3.6 percent.
Against this backdrop, inflation above 6 percent may seem the lesser evil.
Bank of America Merrill Lynch said the Reserve Bank would “likely tolerate a near-term headline inflation overshoot in the context of a weak and hesitant economic recovery”. It predicted the bank would neither cut nor hike over the coming year.
Montalto said the first hike would come “as core inflation creeps to the top of the band around quarter two next year”.
The consumer price index excluding food and non-alcoholic beverages, petrol and energy is the measure of core inflation usually referred to by the Reserve Bank. In January this stood at 4.7 percent.
Stanlib chief economist Kevin Lings said yesterday that rates would be on hold until the end of next year with the first hikes in 2015.
He said the current account deficit – the gap between revenue from goods and services exports and the import bill – at more than 6 percent, would make it difficult to cut rates, but would not force a hike.
And Lings argued: “As consumer spending slows, we should see less imports and an improved trade deficit. The upside risk to inflation appears modest at this stage, unless the rand weakened a lot more.”
Inflation data is due shortly before the MPC statement.
Annabel Bishop, the group chief economist at Investec, forecast an increase to 5.7 percent last month from 5.4 percent in January, and she predicted it would reach the upper limits of the target range in July and August.