Interest rate hike likely?
Economists are divided about the outcome of this week’s MPC meeting.
"For the first time in many years there is no real consensus view amongst economists that the MPC will move rates one way or another,” according to Sean Segar of Nedgroup Investments Cash Solutions.
"The fact that the FRAs are pricing in aggressive rate hikes and the effect of the upcoming election on any rate hike decision adds to the uncertainty,” said Segar.
Looking at recent market movements and various comments from economists and government, there may be some signs indicating the possibility of another, smaller, rate hike in the offing at this week’s MPC meeting.
"We have noticed an uptick in the 3-month Jibar rate over the last while to 5.725%, as well as an increase in the 3-month SARB issued TB rates, which have come in higher than the bank 3-month rates,” says Ray Wallace of Taquanta Asset Managers, who manage the Nedgroup Investments cash funds.
"This is similar to the situation that occurred prior to the last MPC meeting, and we know what the outcome was then,” said Wallace. "Unlike the last MPC meeting however, there is less immediate pressure from an emerging market perspective and the rand is marginally stronger against the USD than it was in January.”
There have also been comments from the Governor of the Reserve Bank indicating her belief that market expectations of 200 bps of rate hikes over the next year or so, may be overdone.
"She did not, however, say that rate hike expectations were necessarily unfounded and may use the opportunity to be seen to be responding to market conditions without making aggressive interest rate changes which would materially affect the weak growth prospects in the South African economy,” said Wallace.
"There have been other comments from Ms Marcus and market commentators regarding the MPC’s recent discussions around the quantum of possible future rate hikes, with calls for smaller increments of 25bps having being considered at the last MPC meeting.
"Based on market indicators, our views of the Governor’s comments, and the inflationary pressures that continue to build as a result of a weak rand and other domestic issues, we would not be surprised by a 25bp rate hike at this week’s meeting,” said Wallace.
"In our view, however, with the need to stimulate as much economic growth as possible, the Reserve Bank can justify holding back on any further interest rate hikes in the near to medium term and allow the inflationary environment to dictate the direction and speed of further interest rate movements.”
