A senior bond-portfolio manager and an emerging-markets analyst from Lehman Brothers both uttered the same dreaded word soon after reading what Tito Mboweni had said in Parliament on Wednesday: hawkish.
In fact, Lehman Brothers felt that this speech was hawkish enough for it to predict a 50-basis-point increase in the repo rate on April 10 to 11,5%. They highlight that Mboweni now appears to be getting worried about second-round inflationary effects.
“South African Reserve Bank [SARB] Governor Mboweni shifted his rhetoric even further to the hawkish side when addressing Parliament’s finance committee this morning.
“Last week, we highlighted Mboweni’s comments after the quarterly bulletin and examined how these had changed since the last monetary policy committee [MPC] meeting. He went further today,” said the Lehman analysts.
They explained that after the January MPC meeting, the main concern of the committee, according to Mboweni, was that downside risks to growth outweighed the risks to inflation, so it paused in hiking rates.
“At the time we viewed that as a policy mistake (and still do) given inflation would be much higher than both the market and SARB were forecasting, with growth slowing sharply on the electricity crisis, but not as much as some were expecting in the market.
“The SARB and Mboweni appear to have now come around to this line of thought from their recent comments,” said Lehman Brothers emerging-market analyst Peter Montalto.
“At last week’s quarterly bulletin, Mboweni rolled out his old list of worries around oil and food et cetera. Today he confirmed what we have long suspected — that there are second-round effects in the economy. Before, he had only described them as a risk.
“Indeed we see second-round effects going further, with our ‘super-core CPI’ [removing all energy, food and housing] rising from 5,2% in January to 5,5% today and peaking at around 6,3% in Q3, a significant move for a core — normally slow-moving — indicator,” he added. “We find it very interesting that he has made this statement just before a CPIX number.”
CPIX came in at a whopping 9,4% shortly after the governor’s speech — the 11th month running it has been over the 6% mark. Mboweni was reported to have said: “So we have a very difficult time ahead of us. We have to tighten our belts.”
“He said similar things before the October and December rate hikes about belt-tightening when the market was uncertain over the MPC’s next move. In the past, we argued that the MPC would concentrate on the fact inflation had passed its peak and was coming down to target (albeit slowly) and so not hike.
“But given its concern over expectations and second-round effects, as well as the potential impact of the electricity tariff hike, this argument no longer seems valid,” said Montalto.
He concludes that now that the authorities’ rhetoric has shifted, investors should look for a 50-basis-point rate hike to 11,5% at the April MPC meeting, with rates on hold for the rest of the year and then coming down slowly from the second quarter of 2009 to a terminal rate of 9,5%.
“It seems clear that the MPC is now more concerned about inflation than growth and will therefore pick up where it left off in December,” concludes Montalto.
The bond fund manager did not go as far as to say that another hike is definitely in the offing, but admitted that it now appears that the probability is higher.
“I thought it was very hawkish and increases the probability rates may go higher [on April 10],” he said. “After the statement, the rand weakened, although it has come back again, so it was a bit neutral. I would say bonds are a little bit edgy.”
The use of the phrase “belt-tightening” seems to be a key change in tone, and if the past is anything to go, it may be the governor’s way of prepping the markets for what may have to come. Of course, as he just as quickly pointed out, the decision is not his alone to make as a democratic vote is taken within the MPC.
These minutes are not published in South Africa, but a few more hands on the 50-basis-point increase side could well be lifted come April 10. — I-Net Bridge