Financial services group Nomura expects the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) to hike the interest rate by 50 basis points at its upcoming meeting next week, adding in a statement on Friday that it had updated its domestic inflation forecast to 6.5% in 2016 and 6.7% in 2017.
“This is the first meeting since the political shock of ‘Nene-gate’ in December, when the SARB stood resolute against emergency meetings or intervention.
“We think the decision was positive to allow a large market shock to provoke a change and in terms of not trying to backstop the rand in a noncredible way,” it maintained.
Noting that the bank had been careful in its rhetoric ahead of next week's meeting – on the one hand wanting to show it remained resolute and credible, but on the other also wanting to contain market perceptions of a large panicked hike – the group asserted that the committee remained aware of weak growth and, as such, wanted to hike the minimum amount possible.
“That means inflation concerns are still offsetting growth fears to allow a 50 basis-point hike,” it held.
However, the move in food prices and the rand remained a challenge to the inflation forecast and was an important component to watch.
Nomura believed the new forecast would lead to inflation being outside of the 3% to 6% target in the third and fourth quarters, returning to within the target range in the first quarter of 2017, which would signal an underestimate of the long and lagged impact of higher food prices and the weaker rand.
The SARB’s likely response would be to continue to highlight risks “very strongly” to the upside and a willingness to continue to hike.
“A 75 or 100 basis-point hike would be a pleasant surprise, but carrying only a 25% probability. We think a 25 basis-point hike would be a policy mistake and would signal it is too worried about growth over inflation and too happy to be behind the curve with serious inflationary pressures building up.
“We assign a 15% probability to a 25 basis-point hike, a 0% likelihood to unchanged rates and, therefore, a 60% probability of a 50 basis-point hike.
We continue to expect rates to enter tight territory of 8.5% by the end of the first quarter in 2017,” it stated.
Meanwhile, Tuesday’s consumer price index (CPI) inflation print of 5.2% year-on-year for core and headline inflation prompted Nomura to publish its new inflation projection based on its rand/dollar exchange rate forecast of 19 by the end of the year.
Assuming oil prices remained flat, at $30/bl, pass-through rates remained broadly unchanged, raw food prices remained the same and Eskom tariffs increased by 14%, Nomura predicted average inflation of 6.5% in 2016 and 6.7% in 2017, after 4.6% in 2015.
“The short-term peak is again 6.5% in the February print before base effects draw headline inflation back to target. Waves of food price pressures would hit shortly thereafter, along with pass-through onto core inflation.
“We expect headline inflation to be back within target in the first quarter of 2018. Overall, we forecast headline inflation to be outside of target for just less than two years,” it held.