A spokesperson from the South African Reserve Bank said on Wednesday that the monetary policy committee (MPC) started its meeting promptly at 9am, with the final rates decision due soon after 3pm on Thursday.
“They will meet all day today and then begin at 9am again tomorrow until lunchtime. The decision is then expected to be read on public television soon after 3pm,” she confirmed.
Thursday’s decision is a particularly important one for the markets, which now expect the tightening cycle to have peaked and are beginning to predict when the next cut in rates could happen. Analysts feel much of this, though, will depend on the rhetoric used in the speech by Reserve Bank Governor Tito Mboweni.
A few analysts feel that the MPC could still surprise with another hike, and a bond market dealer confirmed on Wednesday morning that the market is a little uncertain ahead of this decision.
South Africa’s three-month negotiable certificate of deposit (NCD) has been yielding about 12,1%, just a little higher than the current repo rate of 12% and hence holding out only a small possibility of a rate hike on Thursday. At current levels, the clear majority therefore expect an unchanged stance.
The market had been factoring in higher increases in interest rates, but was surprised on June 12 when the MPC increased rates by just 50 basis points rather than the expected 100 basis points.
Survey
The consensus is for South Africa’s repo rate to remain unchanged at 12% at the conclusion of the meeting. This is according to a survey of 13 leading economists by I-Net Bridge. Of the 13 respondents surveyed, 10 felt the repo would remain unchanged, with three predicting a 50-basis-point increase.
Most respondents also felt the tightening cycle would be over, but that if another increase happened, then August’s increase would mark the end of the cycle.
Peter Attard Montalto, South Africa analyst from Lehman Brothers — one of the three hawks in the I-Net Bridge survey – said he remains hawkish about the upcoming interest-rate decision and expects a hike of 50 basis points despite plenty of talk to the contrary.
“I know this is against the grain as everyone has jumped on the reweighting story,” he said, referring to recent talk and market moves around a new CPI basket potentially bringing inflation lower and prompting the central bank not to hike due to this eventuality.
Montalto pointed to continued economic growth, high wage settlements, negative real rates for the first time and continued second-round effects via electricity increases as backing up his viewpoint.
He emphasised, though, that he remains cautious on these views, although for now he is still sticking to his October hike expectation on top of the August hike.
The MPC increased the repo rate by 50 basis points to 12% in June — against a consensus expectation that the increase would measure 100 basis points after particularly hawkish comments from Mboweni on May 28.
With no increase now, the prime overdraft rate would remain at 15,5% and the current tightening cycle, which began in June 2006, at 500 basis points.
Pressures
Mboweni noted in June that there were major inflationary pressures building up, with the electricity decision weighing heavily. He added that the MPC was mindful of the fact that the economy was responding to the tightening, but that risks to inflationary expectations had deteriorated further.
“The outlook for inflation remains bleak,” he said, adding that the risk to the global and domestic economy was seen to be firmly on the upside. He added that price increases were more broad-based.
Last week, in a speech to Wits business students, he said monetary authorities were clearly very concerned about the fact that inflation in South Africa was outside the 3% to 6% target band.
He scotched talk that inflation targeting was not working and should be abandoned, emphasising that it garnered accountability in the management of the economy.
“All of us have to do our bit to bring inflation to within the target band in the medium term,” said Mboweni.
He noted that the initial disappointment with inflation had expanded to include more generalised pressures. “The core inflation rate is still above the upper limit of the inflation target,” he said.
However, many commentators feel the inflation level is due to peak soon and that this will be a key consideration by the MPC, as a hike may not have the desired effect if inflation does indeed peak and come down. Monetary policy operates with a lag to full impact in the economy of about six months.
Montalto, though, feels all the talk about the consumer inflation-basket reweighting is “overblown to some extent” and that Mboweni is correct in saying he cannot base policy on uncertainties.
“Even if inflation does come down [an Investec report stated it would come down if the new weightings were implemented], it will be dropping from above target to above target. Then you still have second-round effects,” said Montalto.
He said the second-round effects now relate to three years of “big electricity increases”.
The repo rate rose as high as 13,5% in September 2002, before receding to 7% in April 2005, with the current tightening cycle then beginning in June 2006. After a December 2007 50-basis-point hike, the MPC had paused in January. — I-Net Bridge