By Rafiq Raji, PhD
The monetary policy committee of the South African Reserve Bank meets this week, 15-17 March. The consensus view is that the Bank’s benchmark rate would be left unchanged at 6.75 percent. Monetary policymakers at the US Fed, Bank of England, and Bank of Japan also meet this week; all likely to hold rates as well. Incidentally, Moody’s analysts would also be visiting South Africa during the week. Their planned visit comes after putting the country on notice for a potential downgrade of its rating to one notch above junk, the same level rival ratings agencies – Fitch and Standard and Poor’s – currently put South Africa. They say this is not certain, as the rating could also be kept as is, if authorities convince them that the country’s growth outlook would not deteriorate further. I wonder about that, seeing as growth is least likely within the powers of authorities to influence at this time. I think they would downgrade the country’s credit rating by at least a notch. My view – earlier highlighted in a prior column – is that they are probably trying to determine whether a two-notch downgrade to junk status would not be more appropriate. SARB MPC members have probably taken account of a potential junk status scenario in their assessments. Finance minister Pravin Gordhan seems resigned to the possibility as well, based on his comments to the media on 3 March 2016 viz. “It doesn’t matter if it’s too little too late, let’s give it our best shot. If it was too late, at least the people will say we tried.” He continues to make a fervent case for a more lenient ratings assessment, however. In any case, market participants have already priced South African assets for junk status. So, it is no matter really.
More importantly, MPC members would be meeting against the backdrop of still heightened price pressures and a dim growth outlook. The monthly Reuters South Africa Econometer survey – which I participate in – conducted in March shows growth expectations have dampened somewhat. The median growth estimate for 2016 by economists surveyed by Reuters in March is now 0.7 percent. Only a month ago, the figure was 0.9 percent. I am sticking with my 0.9 percent 2016 growth forecast – which I made prior to the downward revision to the same figure by the SARB in January – until there are much more robust indications of the direction the economy is taking. Current trends suggest a downward revision is more likely. Manufacturing production – 13 percent of GDP – contracted 2.5 percent year-on-year in January, a poor start to the year. The only upside is probably news that there might not be power cuts – a major constraint on manufacturing in 2015 – for the remainder of 2016. Still, it is probably fair to say 2016 growth would likely be between 0.5 and 0.9 percent.
Inflation expectations continue to deteriorate. Headline inflation breached the upper bound inflation target of the Bank in January, rising 6.2 percent year-on-year from 5.2 percent in December 2015. The monthly pace is noteworthy. Consumer prices accelerated 0.8 percent month-on-month in January, after only a 0.3 percent acceleration in the prior month. There are indications a quickened pace is likely in February. Year-on-year producer inflation rose significantly in January to 7.6 percent from 4.8 percent in the prior month, a 1.6 percent month-on-month rise. When the difference in prices of final manufactured goods – headline producer inflation – is discounted for volatile food and fuel prices, there is no significant change. Thus, it portends a much faster pace for consumer price inflation in February. The major drivers remain the exchange rate and food prices. An ongoing drought is weighing on agricultural output, forcing food imports to meet supply shortfalls. A weakening exchange rate makes these imports expensive, causing inflation. My annual consumer price inflation estimate for February is 6.7 percent, a 1.1 percent month-on-month acceleration. A likely reduced monthly pace in March – 0.8 percent say – should still see headline inflation come out at 6.1 percent in Q1-2016. So, the SARB’s expectation of 6.2 percent annual inflation in the first quarter of 2016 – if it is unchanged after the March MPC meeting – may still be vindicated. In any case, I do not expect significant changes to their forecasts at this meeting.
Having front-loaded a 50 basis point rate hike to 6.75 percent in January, I would be quite surprised if they decide on another hike in March. This is even as the current account deficit deteriorated significantly in the fourth quarter of 2015 to 5.1 percent of GDP from 4.3 percent previously, due to lower exports and net outflows. Even this may not have been too surprising for MPC members. Their 2016 forecast for the current account balance already reflects at least a 1-percentage point of GDP increase in the deficit. The only downside is that the South African Rand would likely remain pressured for longer. Incidentally, market reaction was relatively muted after the current account data release, especially if you consider the volatility of the exchange rate after President Zuma’s sudden sack of respected finance minister Mr Nhlanhla Nene in December 2015 and subsequent untoward political developments. My view is thus MPC members would wait a bit to see the effects of policy measures announced in January. The voting pattern of MPC members in January also suggests rates would be held in March. The two committee members who voted for a 25 basis point rate hike in January are unlikely to want another one after the 50 basis point increase in January. The one member who wanted rates unchanged in January is likely to still hold the same view in March. I imagine at least one of the three members that voted for a 50 basis point rate hike in January would probably vote to hold rates or hike by 25 basis points. Thus, a majority of committee members is likely to vote to keep rates unchanged at 6.75 percent at this March MPC meeting. This is also the consensus view among analysts surveyed by Reuters ahead of the meeting.
Also published in my back-page column at BusinessDay Nigeria newspaper. See link viz. http://businessdayonline.com/2016/03/south-africas-central-bank-may-hold-rates/