What can we expect from the monetary policy committee meeting?

- The Rand strengthened from R10.57/US$ to around R10.40/US$. The Rand has gained almost 7% since January when the MPC hiked the repo rate at the height of the Fragile Five mini-crisis.

 

- Global risk appetite remains healthy, and South Africa benefited from net bond and equity inflows over the past three months, totalling about R46 billion since March.

 

- Global inflation remains low. Just last week, China’s inflation rate came in well below expectations (1.8%). In fact, all the major global economies – the US, Eurozone, UK, China and Japan – have inflation rates below 2%. Central banks in these economies are likely to remain "dovish” (i.e. keep interest rates low) and US Treasury yields have drifted lower as fears of premature policy tightening have eased.

 

- The oil price has remained steady at between US$107/barrel and US$110/barrel despite significant geopolitical concerns around the conflict between Russia and Ukraine. The average over-recovery on the petrol price is currently 26c/l, pointing to a petrol price cut in June.

 

- Maize prices have fallen significantly due to the biggest harvest in 30 years. Since the March MPC meeting, the near future prices for white maize and yellow maize have fallen 35% and 25% respectively. Wheat prices, which have a bigger weighting in the Consumer Price Index basket, are largely unchanged. Compared to a year ago, maize prices have fallen around 5%, but wheat prices are 16% higher.

 

- Bond yields have fallen, which is an indication that the market expects future inflation to be lower. The yield on the benchmark R186 government bond has fallen from 8.4% to 8.1% since the previous MPC meeting. The breakeven inflation rate – the difference between the yields on nominal and inflation-linked bonds – has also fallen substantially since the beginning of the month.

 

- The latest StatsSA data showed headline consumer inflation rising to 6% in March from 5.9% in February. Core inflation, stripping out the impact of food and energy prices, remained stubbornly low at 5.5%, with limited evidence of pass-through from a weak Rand to higher prices (mostly clothing, food and vehicles). The production side of the economy has seen faster price increases, with the Producer Price Index rising 8.1% in March. However, a weak economy means firms remain reluctant to pass on price increases to consumers.

 

These developments might result in the SARB’s inflation forecast being revised downwards. At the time of the March MPC meeting, the forecast was for inflation to average 6.3% in 2014 and 5.8% in 2015, with a peak of 6.6% in the fourth quarter of this year.

 

Meanwhile, the latest economic data on mining and manufacturing output, vehicle sales and household borrowing have been disappointing, suggesting that the SARB’s growth outlook of 2.6% for 2014 and 3.1% for 2015 is also at risk. Major international agencies, including the World Bank, the International Monetary Fund and the Organisation for Economic Co-operation and Development have also recently cut South Africa’s economic growth forecasts.

 

If these two forecasts are revised downwards, the SARB would resist hiking rates as far as possible, arguing for a very mild rate hiking cycle ahead. We could start seeing increments of 25 basis points in the repo rate. There is a possibility that the MPC will take a wait-and-see approach and only hike in July. Either way, the repo rate will be zero to negative in real terms.

 

Nonetheless, Governor Marcus has reiterated that we are in a hiking cycle, so consumers should avoid taking on new debt.