The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) is meeting this week to decide whether or not to increase or decrease the repo rate. With the announcement due on Thursday, Nomura research analyst Peter Attard Montalto has noted that consumers might be in for a reprieve in the rate hiking cycle at this time.
However, this is not to say that the MPC will not increase the repo rate later this year. In fact, Montalto is expecting that the repo rate will continue to increase this year.
“This is probably one of the most difficult MPC meetings to call we can remember – and not because of growth. We see the SARB MPC taking a tiny space to pause next week but still with eyes on a further hiking cycle to come, and hence, a very hawkish statement will emerge. We put the chance of a 25bp (basis point) hike, however, at 45%,” revealed Montalto on Friday.
Will they or won’t they?
The question of ‘will they or won’t they increase the repo rate’ is one that many are asking. There are a number of factors that need to be examined when trying to reach a conclusion.
“First, inflation fear trumps all if necessary. However, second, in a slow-growth environment, you hike as slowly as you can take room to pause if available. But as a corollary of these two, it means that you can pause but still have eyes set on a high-end point to the cycle,” explained Montalto.
He added: “Basically the SARB can pause because real rates will be under control and there will be room to hike in July just as inflation is starting to accelerate higher to the December peak.”
Furthermore, Montalto pointed out that no new GDP (gross domestic product) data has been released since the previous MPC meeting, and therefore cannot have an impact on the repo rate decision. However, new figures will be released before the July MPC meeting, which may have an impact on the decision then. However, Montalto pointed out that the decision of the MPC will be “highly dependent on Wednesday’s CPI prints.”
Montalto highlighted: “Our view remains that the MPC will hike to 7.50% neutral rates by September, then onwards into tight territory to 8.50% by March of next year, and then hold rates for some time until well into 2018 before cutting rates. We think that this hiking cycle does have a pretty stable framework around it and that the MPC, indeed across the spectrum, is open to hiking into tight territory if inflation risks and unanchored expectations become realities, as we see occurring later in the year.”