The South African Reserve Bank’s two-day monetary policy committee (MPC) meeting got under way in Pretoria on Wednesday morning, the central bank confirmed.
The key decision on interest rates is expected to be announced by governor Tito Mboweni at around 3.3ppm on Thursday afternoon.
All economists surveyed by I-Net Bridge expect no change in interest rates.
Although the forecast is unanimous, the outcome is not as certain as it appears — most economists put the chances of no interest rate cut at only around 60% — not a high probability. A number also believe the odds are even less than this, with some only giving a slight edge to the unchanged decision by the MPC, over a 50 basis point cut in interest rates.
This would be the tenth consecutive meeting at which the majority of economists have forecast no cut in rates, but in August 2004 and April 2005, the SARB did surprise the market by cutting rates by 50 basis points.
The no-change forecast is despite the fact that CPIX inflation (headline inflation excluding mortgage costs) has been below the midpoint of the SARB’s inflation target range of 3-6% year-on-year (y/y) for 18 out of the past 21 months.
The latest available June inflation data painted a promising picture of subdued inflation on both the consumer and producer fronts. The June CPIX came in at a better-than-expected 3,5% y/y and was down from 3,9% y/y in May. June producer prices were also subdued, with the PPI reported at only 2,3% y/y versus 2,4% y/y in May.
Bond and other interest rate product traders are more optimistic than economists regarding the rate outlook, with forward rate agreements (FRAs) currently factoring in a 70% chance of a 50 basis point cut in interest rates by the SARB sometime in 2005.
Factors cited by economists as counting against any cut in interest rates next week include: sustained high oil prices; continuing very strong retail and motor vehicle sales; a sharp rise in consumer indebtedness and borrowing; and Tuesday’s decision by the US Federal Reserve to raise interest rates in that country.
What has made the MPC’s decision more difficult to call, however, has been the increasing number of factors favouring an interest rate reduction, which include better-than-expected inflation data and the strong rand, as well as the unexpected narrowing in the trade deficit during the second quarter of 2005.
There is also a good chance that the SARB will revise downward its own CPIX forecasts into 2006, economists pointed out.
For the MPC’s next meeting in October, the view is more mixed, with some economists seeing a greater chance of a rate cut, and others forecasting even
less probability of a cut as inflation trended higher.
“We aren’t expecting the SARB to cut interest rates in August, but I suspect there is a strong risk that they may decide to do so anyway,” commented Investec economist Annabel Bishop.
“A key is that we expect the SARB to revise down its inflation forecasts when it re-runs its model. So if they don’t cut by 50 basis points now, there is a strong chance they will do so at the next meeting in October.”
“We see the chances for rates to remain on hold in August at about 60%, but this should fall to only 40% in October, by which time we could see rand strength emerging again and manufacturing looking weak, leading to a 50 basis point rate cut by the SARB,” noted Nedcor senior economist Magan Mistry. “The SARB is likely to be conservative for now due to high oil prices, as well as strong retail and motor vehicle sales.”
“Officially we see no cut in August, with a 60% chance that rates will be on hold,” said Absa chief economist Christo Luus.
“We think the SARB will rather play it safe since we do expect inflationary pressures to build up later in the year. There is even less chance of a rate cut in October. We see rates staying stable for the rest of the year.”
“The oil price is a big deterrent for cutting rates now since we still haven’t seen the second- or third-round effects on inflation of the higher price,” commented Brait’s Colen Garrow.
“Tuesday’s Fed meeting will also weigh on the rand. There is a 60% chance the SARB won’t cut rates next week, and we see them moving sideways for the rest of the year until the first quarter of 2006, when we expect a 50 basis point hike.”
“We’re not very optimistic on the interest rate outlook,” added PLJ economist Nico Kelder. “For now we are putting a 70% probability of no rate move in August, mainly due to the high oil price. And if oil prices remain high and the rand weakens, then the SARB could start raising rates. But for now our forecast is rates to stay steady for the rest of the year and probably next year as well.”
According to OMAM’s head of economic research Rian le Roux, “it’s a very difficult call. We are saying a 51%-49% probability that the SARB won’t cut rates next week. The chances of the SARB cutting again have risen since the last MPC meeting with the rand remaining strong, inflation surprising on the downside, and the trade deficit having narrowed, but the oil price at $61 per barrel is the biggest factor mitigating against a cut. Also domestic demand is still very strong. So it’s a close call, but they probably will play it safe.”
Econometrix head Azar Jammine also forecast a 60% chance for no rate cut, citing the “huge increase in indebtedness and borrowing” seen recently as one of the main factors. By October, he believed the chances for no rate cut increased to 70%.
Vector Securities economist Johan Roussouw characterised the odds for no rate cut at a dead-even 50-50%, although he did lean toward to no rate cut. The chances of an interest rate cut in October, irregardless of what happened in August, were much less, he believed, since inflation was likely to move higher
and the SARB would eventually have to hike rates. – I-Net Bridge