Tone of MPC key to rate expectations

By Janice Roberts

By Nazmeera Moola, economist and strategist, Investec Asset Management

Ahead of the South African Reserve Bank’s (SARB) first monetary policy committee (MPC) meeting of the year, the debate is unlikely to focus on a change in interest rates. The big conundrum for the committee is rather going to be the tone they take in this statement.

The plunge in the price of oil – Brent crude has more than halved since mid-June 2014 – has dramatically lowered inflation forecasts. Our forecast of 4% for 2015 is in itself well down from our expectations a mere four months ago. With South Africa’s inflation likely to fall to approximately 3.6% by April, there will be growing question marks about the prospects for rate cuts. Indeed, some in the market are already started to factor in this possibility.

We have seen significant political pressure in Turkey to cut interest rates. Fortunately this is not likely to be a problem in South Africa. Despite a weak economy, there was no political commentary when the SARB hiked rates in 2014.

Therefore, the MPC will be focussing on the inflation trajectory in next week’s statement. While this will drop quite dramatically in the coming months, it is likely to be rising by the end of the year as the benefits of the falling oil price work themselves out of the base.

We believe there is a good chance that the MPC statement would attempt to dispel any expectations of rate cuts. It is not clear whether the market is prepared for that.


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