Expectations ahead of MPC’s rate announcement

With only a few weeks left till the Budget Speech in February, all eyes will be on the Monetary Policy Committee (MPC) rate announcement later this week. 

The last MPC meeting in November, saw the interest rates being kept the same at 7%, as South Africa narrowly averted a credit ratings downgrade. Many economists at the time, however, expressed their concern that this was not a sustainable outcome. With the Budget Speech and its expectations as well as the continued volatility of the rand, this meeting will prove an equally pivotal one.

It is the prediction of some that the South Africa Reserve Bank (SARB) will keep rates on hold at this week’s meeting. “CPI inflation is outside the target and is now just getting past the 6.6% peak of November (bar any surprise this week). Growth is low, but the narrative is neither shifting nor new for the MPC. As such, it should be easy right now to make the case for the SARB MPC to keep rates unchanged on Thursday,” stated Nomura analyst, Peter Attard Montalto.

Further evidence for Montalto’s prediction can be found in SARB’s expectation of a significant slowing in food price inflation. This follows a partial alleviation in drought conditions to date, said John Loos, household and property sector strategist. “From 20.6% year-on-year in June 2016 to 6.9% by November 2016, there is evidence pointing to a looming slowdown in food price inflation. Slowing food price inflation can return the CPI inflation rate to the 3-6% target range in the near term.”

Other contributing factors include the ongoing drought, water crisis, slowing in retail sector sales and the fluctuating petrol price.

Though the expectation is that rates will remain unchanged, the ideal remains a rate cut. “We, however, think conditions will not exist to cut rates in the next two years, and also the MPC framework will remain broadly sticky and not see room to cut,” added Montalto.

Twenty one economists were surveyed by Reuters and the expectation across the board was similarly that the repo rate would remain at 7% throughout 2017, with the first cut coming only in the first quarter of 2018, reported Business Day.

Nomura also iterated that rising oil prices, a stronger dollar, the looming downgrade risk, more Fed rate hikes and a the loosening fiscal policy by the US may be viewed as key risks by the MPC, and could too affect their approach to growth projections going forward.

Overall, no major shifts to both the rates and the growth for the coming year are expected currently.

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