Market expects rate hike

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IOL pic july11 new rand money Reuters .

The monetary policy committee (MPC) of the Reserve Bank could not strongly and persistently say it was in a rate rising cycle and then not hike for six months, Peter Attard Montalto, a research analyst on South Africa at London-based Nomura, said on the eve of the next meeting of policymakers.

Market analysts are divided on whether the two-day meeting, which starts tomorrow, will result in a rate increase.

The MPC surprised economic observers when it hiked by 50 basis points in January. This time, the market is split, with some forecasting no hike, others pricing in a 25 basis point rise and others predicting a 50 basis point increase.

Mamello Matikinca, an economic analyst at Rand Merchant Bank, said the bank maintained its view of a 50 basis point hike but would not be surprised by 25 basis points.

She said inflation expectations were “uncomfortably high” and the lack of economic growth had largely been strike-related, leaving little for monetary policy to do.

Attard Montalto expected a 50 basis point rate hike, with a strongly hawkish statement but a split decision. “While with such weak growth we see a 25 basis point hike as a possibility, we think there is still too much of an institutional hurdle to its implementation.”

 

Fragility

He thought the strike by the National Union of Metalworkers of SA (Numsa) would concern the Reserve Bank more than the strike by the Association of Mineworkers and Construction Union (Amcu), given not only the number of workers involved but also – with Numsa being such a big union – that a large pay increase would be much more easily “transmitted” to other sectors of the economy than in Amcu’s case.

Annabel Bishop, the chief economist at Investec, said the Reserve Bank might adjust its 2015 consumer inflation rate forecast up to 5.9 percent, but was likely to leave the 2016 forecast unchanged.

“The fragility of the economy indicates that no interest rate hike is currently needed, with demand-led price pressures subdued and inflation expectations anchored since the last MPC meeting.

“We expect interest rates will be left unchanged.”

Jean-Pierre du Plessis, a fixed-interest strategist at Prescient Investment Management, said the outcome of the meeting was in the balance.

Inflation was uncomfortably high at 6.6 percent and was expected to remain above the 6 percent ceiling of the Reserve Bank’s target for the rest of this year. He said monetary policy was very accommodative with a repo rate of 5.5 percent and negative real rate of 1.1 percent. On this basis alone, the MPC could be expected to act.

“However, the higher inflation we’ve seen has not been as a result of demand pressure.

“We had negative economic growth in the first quarter of 2014 and it is likely that growth will be close to zero for the second quarter.

“By hiking rates 25 basis points, the MPC can demonstrate its commitment to taking the inflation target seriously, without having too significant an impact on an already fragile economy.”

Du Plessis said forward rate agreements had almost priced in a 50 basis point increase.



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