The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) will meet from today till Thursday (21 May 2015), when it will announce its decision on interest rates.
Commentators are split about whether or not interest rates will go up. According to Nomura, the rates will remain unchanged.
“We think major growth forecast revisions are unlikely at this meeting, with upside from recent data but more pessimism maybe from the staff since the last meeting on such severe load shedding,” said Nomura.
Nomura do not think the broad shape of the forecast will change so they expect the MPC to tell a similar story to the last meeting.
Though, not all agree with Nomura. Nazmeera Moola, economist and strategist, Investec Asset Management, believes that this week’s interest rate decision is going to be difficult to call.
“At the previous meeting in March, Governor Lesetja Kganyago’s tone was exceptionally hawkish about the inflation outlook. This sent a clear message to the market that rate hikes will be coming this year. Indeed, the threats to the inflation outlook have become more pronounced in the past two months,” said Moola.
However, Moola admitted that the market doesn’t quite see it this close: economic consensus is for no change and current market pricing implies less than an even chance of a hike.
The weaker Rand
The weaker rand has also weighed on prices, said Moola.
Nomura agreed saying that there is probably limited scope for adjustments in headline inflation due to the lack of directionality in the currency at the moment.
“Day–to-day the Rand appears to be volatile, it is the second most volatile emerging market currency, but over time it has been depreciating in a consistent fashion,” said Andrew Flavell, wealth manager at AlphaWealth.
Nomura believes that the MPC will hike rates once the market has reacted to the Federal Reserve System’s (Fed) monetary policy - the American central banking system.
“The MPC is also keeping a close eye on indications from the US Fed on the timing and extent of their rate hikes,” agreed Moola.
Rate hikes later in the year
Nomura feels that a rate hike is more likely towards the end of the year.
“The chances of a July hike from the SARB slowly fall a little – it remains our baseline – and therefore of the first hike being September from the SARB,” said Nomura.
It is still believed, according to Nomura, that the key driver of the SARB will be breaking the “fear cycle” of a vulnerable currency feeding into wages, expectations, and core inflation over the long run.