Lesetja Kganyago. Picture: TREVOR SAMSON
Lesetja Kganyago. Picture: TREVOR SAMSON

Economists are braced for an interest rate hike at this week’s monetary policy committee (MPC) meeting, but the decision is likely to be a close call given the fragile state of the economy.

The two main economic events this week will be the release of the consumer price index (CPI) for October on Wednesday, followed by the Reserve Bank’s interest-rate decision on Thursday.

Second-tier data, including tourism, accommodation, land transport, and food and beverage sales figures, all for September, will be released by Stats SA on Monday.

Economists anticipate an uptick in the October CPI to at least 5.1% from 4.9% in September, mainly on account of rising fuel prices.

In October, petrol and diesel prices rose 100c/l and 124c/l respectively. Food price pressures are expected to add to the CPI outcome given seasonal effects. Maize prices are up about 20% year on year.

Citibank economist Gina Schoeman expects a hefty rise in the October CPI to 5.3%, but because a sizable petrol-price cut is due in December, the index is likely to moderate again in the near term.

The Bank expects average annual inflation to lift from 4.8% in 2018 to 5.7% in 2019 but to moderate to 5.4% in 2020. The risks to its outlook lie to the upside, centred on the rand’s exchange rate and international oil prices.

This week the committee will be composed of only six members, following the retirement of Brian Kahn, a suspected dove. In the event of a deadlock, governor Lesetja Kganyago, a known hawk, will have the deciding vote.

The consensus is that the MPC will hike the repo rate by 25 basis points this week, taking it to 6.75%. The Forward Rate Agreement market is pricing in a 64% probability of a hike, down from 72% at the start of November. 

Schoeman expects the MPC to raise the rate because the Bank has made it clear it wishes to steer inflation down towards 4.5%, the midpoint of its 3%-6% target range, rather than continue with an implicit target of 6%.

Three MPC members voted for a hike in September even though the Bank’s forecast is for CPI to remain at or below 6% over the forecast period.

“This is significant as it reveals that indeed the implicit target seems to have dropped from around 6% to around 5.5%,” says Schoeman.

This could be enough to tip the MPC into a modest hiking cycle, she says, especially when taken together with the inflation risks fanned by the government’s looser fiscal policy stance, which has raised the risk of an outlook downgrade from Moody’s.

But it is still going to be a close call.

First National Bank chief economist Mamello Matikinca says the arguments against a hike are equally compelling. These include recent rand strength, the drop in the oil price and the “exceptionally weak” domestic growth environment.

Rand Merchant Bank economist Kim Silberman estimates the petrol price could drop by as much as R1.54/l in December if the rand and oil prices remain near current levels.

In addition, the latest retail sales, manufacturing production and mining figures have all come in below the market consensus, highlighting the fragility of SA’s economic recovery, notes Novare economic strategist Tumisho Grater.

These dovish signals may cause the MPC to pause as it did at the September meeting when the committee voted 4:3 in favour of keeping rates constant.

However, this week the committee will be composed of only six members, following the retirement of Brian Kahn, a suspected dove. In the event of a deadlock, governor Lesetja Kganyago, a known hawk, will have the deciding vote.

Grater thinks it unlikely that the Bank will go against the global tightening tide, given the near certainty that the US Fed will raise rates at its December meeting.

“Rates are only going up,” she says. “When global policymakers normalise monetary policy, it becomes challenging for emerging-market central banks to move in the opposite direction with outright policy easing measures.”