SA Reserve Bank (SARB) governor Lesetja Kganyago regards SA’s economic battle as mostly structural, therefore, requiring firm action by government.
He pointed out that monetary policy is mostly successful when addressing cyclical growth, said Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions.
She commented on SARB’s Monetary Policy Committee (MPC) decision on Thursday to keep interest rates unchanged at 6.5%.
Mamello Matikinca, FNB chief economist, said the downside surprise in the August inflation print (4.9% y/y) showed that demand side inflation remains relatively well contained, with almost all the pressure coming from a weaker rand and higher oil price.
He pointed out that the SARB, however, continues to see upside risks to the inflation outlook, particularly as escalating tensions around the US imposition of trade tariffs hold the potential to precipitate further emerging market (EM) currency weakness.
"While the SARB’s primary mandate is price stability, they remain mindful of the weak domestic growth environment, and as such, kept rates unchanged in the hope that doing so can assist a very modest growth recovery in the second half of 2018," said Matikinca.
Nevertheless, as US monetary policy normalisation continues, FNB expects the MPC to begin a gradual rate hiking cycle at the November meeting.
Luigi Marinus, portfolio manager at PPS Investments, explained that two factors led to the MPC decision. Firstly, the MPC forecasts that inflation will to peak at 5.9% - which is below the top of the target band. Secondly, the August inflation printing at 4.9% was lower than expected.
"The governor did emphasise the view of targeting the mid-point of the band to provide scope for inflation surprises and moving away from an effective acceptance that a level slightly below 6% should provide opportunities for rate cuts," added Marinus.
"Changes in the exchange rate and the price of oil could noticeably adjust the forecasted inflation levels and lead to inflation edging above the top end of the target band."
He pointed out that the MPC continues to use short-term rates as the tool to influence inflation, even at times when it is increasingly difficult to de-emphasise other factors affecting the SA economy.
According to Nedbank's economic unit, the MPC statement clearly indicated that recent developments have raised chances of an interest rate hike.
In its view, much will depend on the movement of the rand over the coming weeks, as well as the impact of other cost pressures on inflation.
"Chances of a rate hike at the November MPC meeting have therefore increased, but we believe that in the absence of demand inflationary pressures, the MPC is likely to hold interest rates steady into next year," said Nedbank.
Economist Sanisha Packirisamy of Momentum Investments said tighter global financial conditions and SA’s relatively poor macro fundamentals highlight the need to maintain an attractive real interest rate profile.
"The SARB’s near-term growth outlook has been revised lower and its risk assessment has deteriorated moderately from being broadly balanced at the previous (July 2018) MPC meeting," she said.
"Lower growth projections left the SARB’s estimated output gap wider in the near term, but it still anticipates the gap to narrow into 2020."
Momentum Investments expects a shallow interest rate hiking cycle to commence early in 2019. Packirisamy added that an earlier hike at the November 2018 interest rate-setting meeting cannot be ruled out, given the balance of sentiment of the MPC which has shifted towards a tighter monetary policy stance.
Investec economist Lara Hodes said outputs from the MPC’s Quarterly Projection Model indicate five 25 basis point increases by the end of 2020.
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