Expect rate hike, warns expert

JULY 22, 2015

A 25 basis point interest rate hike can be expected at Thursday's meeting of the Monetary Policy Committee (MPC) of the SA Reserve Bank (Sarb), according to Peter Attard Montalto, Nomura analyst.

"Rewinding to the last meeting, it is clear that two out of the six members were happy enough to hike rates then (by 25bp). We believe they were Deputy Governor Daniel Mminele and Deputy Governor Kuben Naidoo," said Montalto.

"We believe there is no substantive reason for those two to not back a hike at this meeting as well, even with a marginally more dovish Fed outlook and Greece and after Eskom – because of the currency move, the recent inflation numbers and the general wage round backdrop."

In his view it, therefore, comes down to the Sarb governor Lesetja Kganyago, who can then use his casting vote to secure a hike.

"We think broadly the MPC will remain very concerned about the energy price outlook regardless of Eskom’s tariff application being thrown out (not rejected)," said Montalto.

"The MPC will remain worried about the wage situation with Amcu announcing a dispute in the gold sector, and the implications of the public sector wage round."
The rand being about 4.5% weaker in trade-weighted terms since the last MPC meeting is another factor for the MPC that Montalto mentioned. Core inflation also remains dangerously close to the top end of Sarb's band.
"We see China and Greece as, if not reasons to hike, then not as impediments. The MPC will worry about the impact more on the rand and inflation than on growth," said Montalto.
"All the public speeches and rhetoric from the MPC have reinforced the idea a hike is on the way, despite the volatility on expectations surrounding the Fed and US macro data."

He said there are, however, risk factors to delay them in the other direction. These include oil prices being about 10% lower than at the last MPC meeting, and the Fed being less hawkish than at the time of the last MPC meeting.

"The key here is how the Sarb responds to wanting to not be really ahead of the curve. Although the Fed may still go ahead in September, the much higher likelihood now seems to be of a slower pace of hikes from there," said Montalto.
"Overall, we attach a 60% chance of a rate rise at this month’s meeting which we would describe as an elevated chance. This is down from a 70% likelihood we assigned after the last meeting. We would put a 90% chance of a hike by the September meeting."