Rates remain unchanged, but hikes are looming stronger

The door to interest rate hikes has been opened, said Nomura International’s emerging markets economist Peter Attard Montalto, who believes in a May 2014 hike baseline but thinks there is now a higher chance of an interest rate increase in January. Commenting on Yesterday’s announcement that the South African SA Reserve Bank (SARB) has kept the repo rate unchanged at 5%, Montalto gave his views on what is needed for a rates increase. “In our view a sustained breach in headline in 2015 forecast horizon will be key.” Even though it was not highlighted by SARB Yesterday, core inflation remains a concern. “Inflation basically needs to shift up further, while the growth forecast stays the same or even increases if negativity on the domestic or global economy wanes,” said Montalto.

“The longer USDZAR remains around 10 and as the recovery progresses (even if slowly) so the pass-through rate will increase step-by-step and with it the core inflation forecast and headline inflation in 2015.” This, believes Montalto, can happen by May 2014 – his considered view for a true policy rate normalisation cycle to commence, though he conceded that the monetary policy committee’s (MPC’s) move to hawkishness caught him by surprise. “As such, we must further reinforce the skew in risks we see of rate hikes starting earlier than May,” said Montalto, adding that increases may leapfrog “March to January as the first most likely alternative”.

Many South Africans especially are sceptical of the MPC’s ability to raise interest rates, given the continued weakness of growth. “However, in response the MPC stated firmly that while it is flexible given where growth is, ultimately the inflation-targeting component of its mandate would prevail, i e it would hike. The MPC has the ability to act and “will take and understand the risks to growth in doing so”, said Montalto. “While over the past year the MPC’s credibility has been bolstered by its communications and analysis, we would see a hike as the ultimate proof of its credibility and the security of the inflation-targeting framework,” said Montalto

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