While it appears that the South African Reserve Bank has taken a more dovish view on the economy and its rates policy, Intellidex analyst Peter Attard Montalto, and Maura Feddersen, economist at PwC, warn that volatility remains.
The Reserve Bank on Thursday held interest rates at 6.75% following its first sitting for the year. The decision was based on more favourable local conditions.
While the decision was widely expected, the announcement did have some surprises.
“The 2019 CPI forecast dropped as expected on lower petrol prices – from 5.5% to 4.8%. whilst 2020 moved less on headline from 5.4% to 5.3% (again as expected) – but the surprise here was that core for 2020 dropped sharply in the SARB’s forecast from 5.5% to 5.1%,” said Attard Montalto.
“We are now still below the SARB on headline and core for this year (and above on both for next year) but to a lesser degree than before. This means we think there is some downside surprise scope this year for the SARB in terms of CPI outturns, but equally we think Nersa and taxes in the budget as well as ratings risk should add some upside risks to the outer years of their forecast.
“Hence we see the forecast steepening further,” he said.
According to Attard Montalto, while the Reserve Bank’s statement paid particular focus on the near and medium-term conditions – which came off quite dovish – the longer-term outlook remains uncertain.
“The broad bulk of the statement was about the softening of various near term factors – external and internal, including growth – but the MPC still retains its core view of looking through the short run and still seeing upside risks to inflation in the medium run,” he said.
“However, it has now inserted the operative word ‘moderately’ in that sentence. This is why the November (2018) hawkish statement has become overall much more neutral – and we would describe it as being on the ‘hawkish side of neutral’.”
The SARB highlighted that, while short term inflation expectations are falling back, long-term expectations are still uncomfortably high, he said.
Another rate hike coming
Intellidex holds the view that South Africa will still see at least one more 25 basis point hike this year, even as soon as March 2019.
However, this is difficult to pin down, considering the host of local uncertainties which will be playing out over the next few months.
There’s the Nersa decision on Eskom’s tariff hike request, the budget speech in February, follow-ups from ratings agencies, and the national elections in May.
Attard Montalto said that a ratings decision from Moody’s (the only ratings agency to still have South Africa above junk status) follows just one day after the March 2019 MPC meeting, which further complicates predictions.
The analyst said that a March hike is still the most likely scenario, however.
“Doing this (rate hike) in May or July, for domestic reasons, seems tough given the likelihood of post-elections Ramaphosa – and so a risk premia argument (bar a major Eskom blowout) would unlikely exist.”
Only a major switch higher in food or oil prices might be able to ensure there would be a hike on those meetings if one did not happen in March, he said, adding that if there was no market stress into the March meeting then a hike would seem less likely.
“Overall what we can see is that a judgement on the March meeting will only really be possible after the budget on 20th February – and for now the meeting looks like it would be a 50:50,” he said.
Don’t hope for a cut
“In our view pricing in cuts would be the wrong move,” Attard Montalto, said, adding that those who are looking for room to cut rates are not acknowledging the ratings risk of a Moody’s downgrade this year.
“If there is indeed an actual downgrade from Moody’s, (it) could well be a more non-linear event where the MPC has to move into tight territory with a 50bp hike to backstop against second round effects,” he said.
“Given the reaction function of Moody’s is so uncertain, however, this just has to remain a risk to be highlighted, and not put in our forecast. ”
Economic growth concerns prevail
PwC’s Feddersen said that while the inflation and interest rate outlook have eased, economic growth concerns prevail. The SARB revised down its expectations for economic growth in 2019 to 1.7%, from 1.9% in November last year.
Expected growth in 2020 of 2% remained unchanged.
“Several risks to the growth outlook remain elevated; in particular, concerns around electricity supply shortages. Weak business and consumer confidence furthermore weigh on fixed investment and curtail the potential for faster economic growth.
“International volatility also poses a threat to domestic economic growth, with ongoing trade tensions between the United States and China, Brexit uncertainty and the threat of emerging markets risk spill-over adding to domestic growth concerns,” said Feddersen.
PwC also highlighted risks to the inflation outlook, including rising electricity and water tariffs, rising domestic food prices in the outer years of the forecast horizon, emerging markets risk-off sentiment, a global economic growth slowdown and volatile oil prices.
Additionally, the SARB revised its expectations of the degree of monetary policy tightening required to assure price stability. While in November the Quarterly Projection Model (QPM), a broad policy guideline, suggested three increases of 25 bps each before the end of 2020, the QPM now suggests only one increase of 25 bps before the end of 2021.
As a result, the repo and prime lending rates would only rise to 7% and 10.5%, respectively, by 2021, PwC said.
“The MPC convenes again in March to decide a suitable interest rate stance that anchors inflation near the midpoint of the target range at 4.5%, thereby ensuring price stability in the interests of balanced and sustainable economic growth. Unless key risks to the inflation outlook materialise, the MPC is likely to take a similar stance in March and keep interest rates on hold,” said Feddersen.