Hike or hold? Economists split over rates decision this week

Markets will turn their attention to a rate hike decision by the South African Reserve Bank’s Monetary Policy Committee meeting later this week, following recent local government elections and the mid-term budget policy statement.

The MPC will hold its final scheduled meeting for 2021, with a decision on interest rates set for Thursday (18 November).

“It is all about the SARB’s inflation and real GDP growth outlook, as well as the risks attached to the central bank’s forecast,” said the Bureau of Economic Research (BER).

It pointed to 15 analysts surveyed by Bloomberg last week who are almost evenly split between those expecting the repo rate to be kept unchanged (eight forecasters) and those that have pencilled in a 25bps hike (seven).

“If nothing else, the lack of an overwhelming consensus emphasises that the decision should be close. Indeed, we think the MPC could be split 3-2 in favour of an increase but acknowledge that it could also go in the opposite direction,” the BER said.

Some of the factors that the MPC will consider are that the Brent crude oil price and the rand exchange rate have moved against the inflation outlook. Global inflation also continues to surprise on the upside.

“At the same time, the three-week strike in the South African steel sector during October and the return of load-shedding have clouded the short-term SA GDP outlook. However, as a policymaker, if you are thinking about starting with interest rate normalisation, it is probably not a bad time to do it when the Covid-19 infection numbers are low – as they currently are in SA – and consumers are not already hunkering down.”

More fundamentally, the BER said that in a global environment where several central banks have started the normalisation process, the MPC might not want to fall too far behind the curve.

“Rather start early and then move gradually with rate hikes as opposed to waiting and then perhaps being forced into being more aggressive than you would want to be. This is key to why we see the first rate hike this week,” it said.

“However, it has to be said that many of especially the emerging market central banks that have already hiked are grappling with well above-target inflation. This is not the case in SA. Again, these nuances emphasise that it should be a close decision.”

Inflation a sleeping giant

Luigi Marinus, portfolio manager at PPS Investments, noted that globally, inflation has started to increase for the first time in many years.

“The conservative argument about inflation is that it is transitory, which is what the US Federal Reserve has alluded to. This effectively implies that current inflation is not permanent as it is coming off a low base caused by the slowdown during COVID-19 related lockdowns.”

In South Africa, Marinus pointed out that the most recent inflation print was 5% – the second time that inflation reached this level since November 2018. Like the US, South African inflation is also coming off a low base, he said.

Inflation has accelerated since July’s 4.6% year-on-year to 5% in September.

“The less benign argument is that years of low short-term interest rates and increased money supply is finally having an inflationary effect. In addition, the cheques handed out in the US during lockdown have been used by consumers on goods and not invested as was the case previously when excess capital was mainly held by corporates.”

The South African Reserve Bank (SARB) has an inflation target of 3% to 6%, so the latest inflation print of 5% is within the band and should normally not trigger any concerns, the portfolio manager said. “However, the SARB has made it clear on several occasions that a point estimate at the mid-point of the target band is where long-term inflation will be aimed.”

Recently, Marinus said that the SARB governor, Lesetja Kganyago, mentioned the possibility of officially reducing the inflation target to 3% to reduce the long-term effect of a structurally high inflationary economy. “While this may be commended as a noble aim, it was widely seen as too far of a stretch in expectations to be seriously considered.”

Economists are split

A Reuters poll of 20 economists pointed towards a hold on rates by the SARB. Thirteen of 20 economists surveyed by Reuters between 10 and 12 November said the repo rate would be kept unchanged at 3.50%, while the other seven predict a hike of 25 basis points.

In an extra question answered by 12 economists, a median of responses suggested an almost 50% chance the SARB would hike interest rates at the next meeting.

BNP Paribas chief economist Jeff Schultz thinks the rate will and should increase, noting the economy is ready for a gradual increase to interest rates.“… we deem it prudent and appropriate for the SARB to begin a gradual process of monetary policy normalisation so as to ensure inflation expectations remain well-anchored which will ultimately allow it to not have to quickly raise rates back up towards pre-pandemic levels anytime soon,” he said.

“We expect the decision to be a close call with a 3:2 split on the 5-person committee and indicative of a central bank that favours a ‘gradual’ and prudent normalisation path and one that is careful not to stall the incipient recovery.”

A Finder.com panel of 20 economists was also almost evenly split – though this time with more leaning towards a hike. 55% expect the rate to increase, while the others expect a rate hold. The panel flipped on what the MPC should do, with 45% recommending an increase and 55% a rate hold.

University of the Free State senior lecturer Dr Johan Coetzee thinks the rate will increase but favours a hold and says the next decision will be a tough juggling act. “On the one hand, inflationary pressure is picking up, but on the other, there are challenges on the growth side, both on the demand and supply side of the economy.”

Wits Business School Professor Jannie Rossouw is one of eight panellists who thinks the rate will and should hold, citing benign inflation. “Until such time that there are clear trends and indications that inflation expectations are on the increase, rates should be left at their current level.”

Head of SA economic and FIC research at Standard Bank, Elna Moolman, thinks the rate will first increase within the first few months of next year.“We think that the SARB is concerned about the potential risks from negative real interest rates, and will want to “normalize” interest rates as the economy recovers to its pre-pandemic peak real GDP level.”

The Reserve Bank was expected to hike rates in each of the first three quarters of next year by 25 basis points each time and then pause in the last meeting of 2022 before hiking again – either in January or March of 2023 – to an eventual 4.50%.

Read: Expect an interest rate hike in November as South Africa faces headwinds in 2022

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Hike or hold? Economists split over rates decision this week