Surprise hold on rates was ‘the right choice’: analyst
The South African Reserve Bank’s (Sarb) surprising decision to hold rates was the right move, says research analyst at Nomura, Peter Attard Montalto.
This is because, even though the local economy has room to cut rates, the other surprise cut in July was not timed well, and would have been viewed as a mistake in the long-run, he said.
In a note to investors this week, Attard Montalto said that the cut in July was problematic, as it was more reflective of the ‘doves’ (the members of the Monetary Policy Committee who are more optimistic) growing impatient with the market, rather than an actual reduction in the risks facing South Africa.
“Given the risk outlook, we do believe that keeping rates unchanged is the right move. As we previously stated at the last meeting, while there was short run market scope for a reduction in rates at the time – we thought with hindsight after the MTBPS and with index risks next year, it would have looked like a mistake,” the analyst said.
“The decision not to cut was a disappointment vs expectations and understanding of the cohesiveness of the dovish camp, but does correct somewhat for a ‘mistake’ at the last meeting if we take a step back.”
Attard Montalto also believes that there will be no more rate cuts for the rest of the year – counter to many expectations that another 25 basis-point cut will come when the committee meets in November.
“We see November being too high a risk point for a cut and indeed there may well be a smaller number of members voting for a cut at that point than today,” he said.
However, he noted that if there are any CPI surprises that shift the CPI forecast back lower, a vote to cut could suddenly be sustained in the face of risks, or if the committee thinks it has waited long enough since July.
“This is ultimately the problem looking at the rate outlook. We have a group of doves who are happy to discount some of the risk outlook and its impact on the currency and into inflation, and are impatient waiting for risk events, and a group of hawks looking at things very differently where the ‘fear’ around inflation risk still prevent cuts, given patience waiting for risk events to pass,” the analyst said.
One key risk could actually see rates hike higher, Attard Montalto warned – specifically looking how Eskom’s tariff increases could impact consumers.
“A large Eskom tariff increase can also skew the risk towards hikes. The Sarb pencils in 8% for tariff increases next year, but there is a 19.9% MYPD-III application, and on top of that a significant RCA application which may well be another 30% recoverable over several years. We have pencilled in 12% for next year,” he said.
This, combined with other negative outlooks around politics and the economy (particularly if South Africa is kicked out of the World Government Bond Index due to junk status), rates could be hiked by 50 basis points or even more in 2018, he said.
“Sarb policy will remain very much meeting by meeting. We think the market overestimates the downside skew in rates when there is the probability of hikes to come; consequently, pricing should be more cautious.”
Read: SARB hesitation is stifling Bitcoin and Ethereum growth in SA
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