GLOBAL market research firm Nomura on Thursday said it expected a 50-basis-point rate hike from the South African Reserve Bank’s monetary policy committee (MPC) at its meeting next week.
Nomura analyst Peter Attard Montalto said strategically, the MPC understood that it could not “strongly and persistently” communicate it is in a hiking cycle and not hike for six months.
“The flow and rand situation at the last two meetings in March and May, together with headline inflation below target and not such immediate wage stories building, allowed room to breathe and to undertake a stop-start cycle.
“However, the deteriorating fiscal picture and likely one-off of first-quarter current account deficit shrinkage; the downgrade by Standard & Poor’s (with the strong risk of more to come from the other agencies); and now firmer communication from the Fed about the path through the end of QE-tapering into rate hikes, all mean that time has basically run out and there is no more breathing room in our view,” he said.
Mr Montalto said the consumer price index (CPI) printing at 6.6% in May and a likely upcoming print of about 6.7% for June will be of serious concern for the Reserve Bank.
He said the current National Union of Metalworkers of South Africa strike would also be of concern.
“Currently, a 9%-11% wage settlement for different levels of workers seems likely, which would concern the MPC. While we think the bank has overplayed the risks of a wage-inflation spiral to some degree in the past, we think that fear is still very much present and again enough to tip it over into a hike,” Mr Montalto said.
Nomura said it would view a decision not to hike rates next week as a mistake given the wage situation and CPI outlook, as well as the additional vulnerability it would engender in the currency by reinforcing the bank’s doubters.
Nomura said the decision would also confirm to many market participants that the January hike was just a case of copying the actions of the Turkish central bank.
“A 25-basis-point hike would be interesting as it would be a first — we would view it as a missed opportunity rather than a mistake. As ever, though, we stress that the bulk of the analysis above reflects what we think the Reserve Bank committee is thinking and how it will act, not how it should act,” Nomura said.
The meeting is scheduled to begin on July 15. A decision on rates will be announced on July 17.