Economists see close call for rates

By Drum Digital
19 May 2016

The recent rise in the oil price and weaker currency may be the spanner in the works when the South African Reserve Bank's (Sarb's) monetary policy committee (MPC) announces its interest rate decision later on Thursday.

Cape Town –

However, most experts expect the Sarb to hold now and raise rates again later in the year.

Oil prices, which retreated somewhat on Thursday on fears that the US will raise interest rates as soon as June, were still at almost $20 above their 13-year lows of below $30 in February.

At about 08:45, US benchmark West Texas Intermediate (WTI) for June delivery was down 63 cents to $47.56 a barrel and Brent for July down 81c to $48.12, according to AFP.

The rand was trading at R15.84/$ from R15.92 earlier in the session after an overnight close in New York of R15.86.

A slight drop in consumer price inflation and softer than expected retail sales data released on Wednesday also supported the call for a hold on interest rates.

Wichard Cilliers of TreasuryOne said the inflation data for April holds mixed implications for the Sarb. "First off, the print at 6.2% y/y (year-on-year) is in line with expectations and down considerably from the base effect-driven high of 7% y/y achieved in February.

"These factors should allow the Sarb a certain amount of breathing space after it tightened interest rates by a full 100bps at the last three consecutive monetary policy committee meetings.

"That’s a lot of tightening in an economy that will not grow even 1% this year and where weak spending growth suggests sub-trend growth will continue into 2017," he said.

He however cautioned that food price inflation may pose a problem. "Food price inflation saw a strong monthly gain in April, up 1.9%. In y/y terms, food price inflation is running at 11.3% and could be subject to further upside pressure, exacerbated by a weak rand (which is already vulnerable to political developments and the potential ratings threat to South Africa). Making matters worse for South Africa, oil prices – long a mitigant - are now rising more strongly."

Citi Research economist Gina Schoeman also said they do not expect the Sarb to hike the repo rate, given "front-loading in hikes so far this year and a generally stronger currency since the March meeting".

"That said, it is likely to be a close call given the recent rise in the oil price and recently weaker currency. We expect one more rate hike of 25bp (basis points) in July," she said.

NKC African Economics analyst Hanns Spangenberg said on Thursday they expect the MPC to abstain from hiking interest rates later in the day, partly given that so-called core inflation remains below 6% y/y. This, however, doesn't change their view that the Reserve Bank will tighten its monetary policy stance later during the year, he said.

Official statistics on Wednesday showed that headline CPI decelerated in April to 6.2% y/y from 6.3% in March, but was up 0.8% on a month-on-month (m/m) basis.

The deceleration comes despite sharp rises in the y/y cost of food and beverages and month-on-month (m/m) price of petrol.

Food inflation registered 11.3% y/y in April from 9.8% in March. Price increases (urban areas) were particularly pronounced for vegetables (23%), fruit (19.6%) and bread and cereals (14.9%).

While petrol prices contracted -2.3% on a y/y basis, they rose by 7.5% on a m/m basis due to the price hike.

"The rand’s weakness against most major currencies, coupled with a recovery in the oil price suggest that inflation will begin to gain momentum in the coming months and remain outside the bank’s target range - 3%-6% - for an extended period of time," said FNB senior industry analyst Jason Muscat.

Despite these risks, he reckons the Sarb will likely keep rates on hold, "but will be forced to act as pass-through speeds up in the latter half of the year".

On the slower growth in retail sales of 2.8% y/y for March from February’s 4%, Muscat said it supports the bank's view that the Reserve Bank has scope to keep rates on hold on Thursday.

Statistics SA announced on Wednesday that seasonally adjusted retail sales for March slowed from a 0.4% m/m increase in February to 0.2% m/m in March. As result, total retail trade sales fell from 4% y/y in February to 2.8% y/y last month, considerably lower than market expectations of a 3.6% y/y increase in March.

Sole positive contributors to the 2.8% y/y increase were general dealers (expanding by 6% y/y and contributing 2.5 percentage points) and retailers in textiles, clothing, footwear & leather goods (expanding by 4.9% y/y contributing 0.9 percentage points).

Contractions were recorded by retailers in hardware, paint & glass (-5.1%),  household furniture, appliances & equipment (-1.9%) and ‘other’ retailers (-0.8%).

NKC said it expects pressure on retailers to intensify as the combination of drought-induced higher inflation and tighter monetary policy conditions makes its presence felt on consumers’ pockets.

Source: Fin24

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