Cape Town – Although the South African Reserve Bank (Sarb) kept interest rates unchanged on Thursday, there’s a meaningful chance they could go up in the first half of 2017, according to Nomura economist Peter Attard Montalto.
At Sarb's monetary policy committee (MPC) briefing, Reserve Bank governor Lesetja Kganyago said the higher than expected headline inflation of 6.4% and increased volatility since the US elections - including statements of protectionism - could cause even more rand volatility.
The Sarb noted that the market was pricing in more rate hikes by the US Federal Reserve; the strong dollar and the effect these factors could have on emerging markets such as South Africa bring about more uncertainty, a more volatile rand and a future downside risk to the currency.
At the last two MPC meetings Kganyago signalled that the end of the rate hike cycle was close, but on Thursday he hinted that this position would probably need to be “reassessed” if the upside risks transpire, Montalto said.
During a question-and-answer session, Kganyago admitted that there had been no proposal to hike interest rates this time around, but that there had been a discussion that could lead to future rate hikes. “The skew in risk around rates therefore seems clear,” Montalto said.
On the domestic front, South Africa’s gross domestic product growth outlook remained unchanged. Kganyago previously estimated headline inflation would be about 5.8% in 2017, and the long end forecast on Thursday was kept unchanged at 4.6% for the fourth quarter of 2018.
Nomura does not regard wages, the labour market or oil prices as domestic drivers of inflation, although the rand and food prices could put pressure on inflation.
Should the rand trade at R15.50/$ the Reserve Bank may well consider hiking interest rates in the first half of 2017, Montalto said.
In addition, the political environment is likely to be “noisier and fiercer” leading up to the ANC’s elective conference towards the end of 2017, while a lack of GDP growth could result in credit rating downgrades in the middle of next year, if not now.
“Then we think the chance of rate hikes in the first half of 2017 is very high.” Montalto said there’s currently a 45% probability of a 25 basis-point move twice next year.
The Reserve Bank should respond “calmly” to any volatility in the rand as US policy under a Donald Trump presidency becomes clearer.
Nomura will keep a close eye on food inflation and movements in the rand in the coming months, Montalto said.
“We should be cautious on markets, however, in the first half of 2017. The strong dip back in CPI to 5.1% in May, according to our forecasts may cause over-eager markets to price in rate cuts erroneously.”
Ultimately, however, the Reserve Bank has an easier job than its emerging market peers such as Turkey, Montalto said. “Risks are there and the Sarb is right to remain vigilant and conservative.”
If the rand is resilient, although volatile, it will give the Sarb some room to keep rates steady for the foreseeable future.Read Fin24's top stories trending on Twitter: Fin24’s top stories