The market pundits are again debating whether there will be another interest-rate hike next month, especially after Wednesday’s CPIX number came in at 5%, marginally lower than the 5,1% expected, and signs that food inflation has peaked.
After a practically unanimous view last year that a further rate hike was likely to follow December’s 50-basis points increase, new data, combined with a lower oil price and a reasonably strong rand, has some economists reviewing their positions.
One of the best measures of market sentiment is the forward rate agreement (FRA) market, which tracks interest rate movements in three- month intervals. Although the FRA market suggests there is still a 70% probability of a rate hike, this number is falling daily, suggesting that ambivalence has entered the market.
Stanlib economist Kevin Lings says his money is on a further rate hike, but he is not emphatic. “This is not a time to take a huge call, it is not an absolute certainty,” he cautions.
Lings believes the debate will be around the risk of further pressure materialising and then having to hike rates in April. “On balance, if I was the Reserve Bank [governor] I would be vigilant and hike now rather than … later.”
Goolam Ballim, chief economist at Standard Bank, is one of the few economists who believe that the rate hikes have come to an end.
While it is too early to gauge the full effect of last year’s 200 basis points hike, early data suggests that higher interest rates are having an impact. Sales of both durable and semi-durable goods, which are the first sectors to be affected by interest rate movements, are slowing.
Ballim says there are also signs of a loss of momentum in mortgage advances and car sales.
Surveys suggest businesses are already expecting a softening in the economy with sub-indices in the Purchasing Managers Index indicating that purchasing managers are expecting a slowdown in sales.
“There is a rational argument for the South African Reserve Bank not to act in February,” says Ballim, who believes it is safe to argue that interest rates peaked in December and that a 200 basis point hike was enough to bring inflation under control and steer credit growth to more palatable levels.
Apart from putting breaks on consumer borrowing, consumers are close to maxing out on the amount of credit they can access, which in itself will assist to slow down credit expansion without the need for further sticks in the form of higher rates.
Considering that the unexpected rate hike in June last year was based on predictions of higher oil prices and a weaker rand, Ballim says that should oil hover at about $60 a barrel and the rand average R7,30, inflation is expected to just touch the 6% top end of the target range in April before falling. Under this scenario there would be no reason to increase rates again.
Food inflation also appears to be under control, which was a major driver of higher inflation numbers last year.
The global environment is also a factor. In June last year many analysts believed Reserve Bank Governor Tito Mboweni’s surprise decision was partly driven by global rate hikes and that he was following the global trend. Consensus is that the global monetary tightening cycle is over and that interest rates hikes in other countries are unlikely this year. One more reason why Mboweni may stay his hand this time round.
Ballim goes as far as suggesting a rate cut towards the end of the year. He points out that in 2002 the time of the peak of the rate hikes to the first rate cut was only two quarters.
Mark Wurr, head trader at Global Trader, is on the side of a rate hike. He believes that the recent rise in oil from $50 to $55 a barrel suggests it could be on an upward path. If that happens, Mboweni may be inclined to pop in one more hike.
“Maybe he will be sneaky and just do a 0,25%, but I believe there will be a hike,” says Wurr.
But be warned: one thing we do know about Mboweni is that he is known to take the market by surprise, so don’t bet the house either way.