Is an April rate hike bright?
Evan Pickworth
Thu, 27 Mar 2008
While there is now a clear danger the Monetary Policy Committee may raise rates in April, Nedbank's Economics Unit argues there are also a number of countervailing factors weighing against such a move.
The analysts note that key areas of spending have already started to slow in response to the cumulative 400-basis-points increase in interest rates since June 2006.
"Global conditions have also deteriorated and the sudden onset of the electricity crisis has damaged short-term growth potential and confidence. Clearly these circumstances do not call for tighter monetary policy," say the Nedbank economists.
They point out, though, that the inflation outlook has deteriorated significantly since the Reserve Bank's Monetary Policy Committee meeting at the end of January and hence there is a danger rates may go up again.
"At the time of the next meeting in April, the inflation expectations survey of the Bureau for Economic Research will therefore show a marked worsening in expectations. Although much will depend on the rand and the oil price in the interim, there is clearly a danger that the MPC might raise rates once more," they add.
Second-round inflation
Of particular concern right now is second-round inflation, pinpointed by central bank Governor Tito Mboweni last week as the key issue that could "force the MPC's hand" in April.
Today's CPI release confirms these suspicions.
Core inflation, which excludes the effect of volatile food prices, indirect taxes and interest rates, jumped to 8.9 percent year-on-year from 8.1 percent in the previous month.
Interest rate sensitive prices (CPIX minus food and administered prices), which depicts second-round inflation in the clearest possible way, increased by 5.7 percent in February, exactly the same as in January.
Dynamic Wealth says: "Though this number did not increase, which is encouraging, it also did not decrease. And as petrol prices for March will show a year-on-year increase of 37.7 percent to push non-interest inflation even higher than the current 13.3 percent, it will most certainly have an impact on interest rate sensitive prices.
"In addition, the proposed electricity tariff increases will also add its weight to increase in the fuel and power category from its current increase of nine percent to way above 10 percent. These changes might see March's CPIX to increase by around 10 percent."
Nedbank's Economic Unit's preliminary forecast for CPIX inflation in March is an even higher 9.8 percent year-on-year from the 9.4 percent announced today.
"CPIX is expected to increase by 1.4 percent over the month due to the combined effect of higher food prices, higher tobacco and alcohol prices following increases in excise duties, higher transport costs resulting from the 61c/litre petrol price hike in early March, higher education costs and higher household operation costs reflecting increases in domestic worker wages," they say.
However, this is then seen as the peak, with a gradual decline in store thereafter.
"International oil prices, the rand and electricity tariffs"
"Thereafter, CPIX inflation should move slowly lower to end the year at around 6.7 percent year-on-year. However, key risks to the inflation outlook are movements in international oil prices, the rand and electricity tariffs," they note.
While some analysts like Lehman Brothers are already factoring in a 50-basis-point hike in light of today's developments, others call for calm.
The rhetoric from the governor and use of the dreaded "tightening of belts” phrase again does not bode well.
But as Mboweni also highlighted today he has never said rates are going up. There are significant risks, however, and the MPC will be weighing them very carefully come 10 April.
The risks though of another hike certainly do appear to have increased significantly.
Thanks for the effort.
I'm looking for what it was on the 8 January ...