Important disclosures can be found in the disclaimer
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Interest Rate Barometer
Executive Summary The interest rate barometer considers the
factors influencing the decision
of the SARBs Monetary Policy Committee in the statement
accompanying
the previous meetings interest rate decision (26/03/2015) as
well as
developments since the previous meeting which could influence
Thursdays
MPC rate decision. The factors are rated on a stand-alone basis
as a likely
hike, hold or cut and are weighted into 3 broad categories:
global economy
(20%), domestic economy (40%) and major inflation drivers (40%)
as per
Table 1.
Of the 13 factors analysed above, 7 support expectations for an
unchanged
policy, while 4 factors favour a hike and 2 factors favour a cut
(see Table 2).
Using the weightings, there is a 54% bias for rates to be
unchanged, a 31%
bias for a hike, and a 15% bias for rates to be cut. Of the 7
hold factors, 5
are at risk of being hike factors at subsequent meetings. As
such, while
the headline analysis appears more dovish, the underlying
hawkish trend is
somewhat understated.
Our view is for rates to remain on hold for an unchanged repo
rate at this
meeting. Lower energy prices and a muted trade weighted rand
remain in
play since our last Barometer and MPC. As such, the probability
of a hike
later in 2015 remains.
Disinflationary pressures in the developed world continue to
abate while
the domestic demand and supply data have deteriorated, resulting
in a
domestic factor counterbalance to global factors.
Our expectation for the global interest rate trajectory to
remain flatter for
longer remains in play. We have long said that the debate around
the
timing of the Fed hike is less important than the profile of
such a hiking
cycle. We remain of the opinion that the Fed will hike in
September which
will likely spur the SARB into a hike at the September meeting
as well.
Table 1
Factors Outlook at the May policy meeting Recent developments
Rate impact
GLOBAL
ECONOMY (20%)
Growth The outlook for the global economy is broadly unchanged
since the previous meeting of the MPC. The US growth forecast for
2015 has been revised down by about half a percentage point
Eurozone growth has surprised on the upside Japan is expected to
growth by just below one per cent this year. Growth in some of the
larger emerging markets remains weak. Negative growth is being
experienced in Brazil and Russia, and although the Chinese economy
is still slowinga hard landing is not expected amid further
monetary policy easing. By contrast, the Indian economy has been
performing strongly While growth in Africa has remained relatively
robust, downside risks have emerged in some of the oil and
commodity-producing countries.
Since the last MPC, estimations for US GDP have ticked
marginally higher but remain sub-trend. Chinese growth numbers came
in better than expected at 7% although they are expected to slow in
the latter part of the year with consensus expectations at 6.9% for
2015. Emerging market growth expectations have deteriorated with
Bloomberg consensus estimates falling from around 4.6% at the last
MPC to around 4.3% currently. Notwithstanding the Greek crisis
recently, expectations for Eurozone growth remain reasonably upbeat
with Mario Draghi indicating that the crisis has not affected the
recovery thus far.
HOLD
Inflation and interest rates
Global inflation remains benign, but the partial recovery in the
international oil price has ameliorated the deflationary risks in
some of the advanced economies in particular... However, most
central banks remain in loosening mode...
Since the May MPC, the US headline CPI has ticked marginally
above zero after a brief move into deflation. The targeted PCE
measure has also accelerated to 0.9% m/m after a dip to 0.1% m/min
April. UK CPI is at 0%, with the Eurozone at 0.2% y/y. Most global
central bankers see the decline in inflation as transient with an
uptick in the latter part of 2015 and early 2016.
HOLD
21 July 2015
Nedbank Capital Strategic Research
Mohammed Yaseen Nalla, CFA
+27 11 295 5430
[email protected]
Reezwana Sumad
+27 11 294 1753
[email protected]
https://www.nedbankcapitalresearch.co.za
Nedbank Capital
Interest rate barometer | 21 July 2015 Page 2 of 4
Table 1 (continued)
Factors Outlook at the March policy meeting Recent developments
Rate impact
GLOBAL
ECONOMY (20%)
(Contd)
Oil price The international oil price appears to have stabilised
in the US$60-US$70 per barrel range Since the previous meeting of
the MPC, Brent crude oil prices have increased by about US$10 per
barrel.
Oil prices have fallen by 14.8% since the last MPC meeting in
May, falling from around $66/bbl. to around $56/bbl. The
possibility of Iranian supplies entering the market after a deal
with developed nations remains on the agenda. The global supply
glut also continues to be a feature. On an annualised basis, the
oil price is 47.5% lower, with the base effects likely to ease
closer to the end of the year.
HOLD
DOMESTIC ECONOMY
(40%)
SARBs GDP forecast
The domestic growth outlook remains weak, amid continued
electricity supply constraints and low and declining levels of
business and consumer confidence. The Banks forecast for GDP growth
is marginally down from the previous forecast: growth is expected
to average 2,1 per cent and 2,2 per cent in 2015 and 2016, and to
increase to 2,7 per cent in 2017However, the risks to growth are
assessed to be on the downside.
Q1 GDP printed at 2.1% y/y. Consensus expectations have also
been revised marginally higher for 2015 but lower for 2016 and
2017. The growth outlook remains subdued due to electricity
shortages, high wage demands, and low consumer demand both globally
and locally and risks to the outlook remain to the downside.
HOLD
Domestic supply
Despite a strong performance by the mining sector in March,
first quarter growth is expected to be subdued and much lower than
the 4,1 per cent measured in the fourth quarter of 2014By contrast,
manufacturing output appears to have contracted by about 0,6 per
cent in the quarter, consistent with the continued decline in the
Kagiso PMI.
Mining production remains weak after a brief uptick on low base
effects. Growth of 2.7% y/y in May, 7.9% in April, followed a surge
of 19.9% in March. SA manufacturing production remained downbeat as
well, falling by 1.4% and 2.1% y/y in May and April respectively. A
surprise uptick in PMI data in June may alleviate some of the short
term pressures but the sector remains beleaguered.
CUT
Domestic demand
Consumption expenditure by households is expected to remain
relatively subdued, as higher personal tax rates take effect and
the benefits of lower petrol prices dissipate. There are mixed
signals from the retail trade sales which rebounded strongly in
February but then contracted in March on a month-on-month basisThe
FNB/BER consumer confidence index declined sharply in the first
quarter of 2015, signalling modest growth in consumption
expenditure going forward.
New Vehicle sales fell by 4.8% in June, from a decline of 3.2%
y/y in May. Sales of passenger vehicles, light, medium, and extra
heavy commercial vehicles contracted with total commercial vehicle
sales also lower.
SA retail sales have been reasonably robust considering the
economic backdrop but seem to be easing. The May retail says print
came in at 2.4% from 3.4% in April with the general dealers
category still the key driver up 2.3% in May contributing 0.9
percentage points to the headline number.
CUT
Monetary conditions
Subdued levels of household consumption expenditure are
reflected in credit extension by banks to households, where the
divergence between households and corporates continues. Growth in
credit extension to the corporate sector was 13,9 per cent in March
2015, compared with 3,6 per cent to households. The latter is
reflective of continued weak growth across all the main categories
of credit, influenced by both supply and demand factors... At the
same time, weak employment growth, high debt levels and continued
household deleveraging, as well as expectations of higher interest
rates may have impacted on the demand for credit.
Private sector credit extension growth in May accelerated to 9.5
% y/y, slightly higher than the market forecast of 9.4 % from 9.3 %
in April, with credit to companies remaining firm at 14.4 % y/y,
while loans to households remained weak at 3.2 % y/y. Credit growth
is not expected to rise significantly in the months ahead and is
therefore likely to have little impact on demand pull inflationary
pressure.
HIKE
Forecast of inflation
The inflation forecast of the Bank has changed since the
previous meeting of the MPC. Inflation is now expected to average
4,9 per cent in 2015, with a first quarter low of 4,1 per cent. A
temporary breach of the upper end of the inflation target band is
still expected during the first quarter of 2016, to peak at 6,8 per
cent, and to decline to 6,0 per cent by the second quarter of that
year. An average inflation rate of 6,1 per cent is forecast for the
year. The forecast period has now been extended to the end of 2017,
with an average inflation rate of 5,7 per cent expected for the
year, and 5,6 per cent in the final quarter.
Nedbank forecasts inflation to average 5.0% in 2015 (revised
higher) and 6.1% in 2016, differing from SARBs forecasts of 4.9%
for 2015 but in line with the SARBs 2016 expectation. SA CPI rose
to 4.5% y/y in April and 4.6% in May, up from 4.0%in March. Core
inflation remains sticky at close to the upper end of the 3-6%
range, printing at 5.7% in May.
HOLD
Market expectations
Forward rate agreements are pricing in a 50% probability of a
25bp rate hike at this weeks MPC meeting, a 122% chance of a 25bp
rate hike in 3 months time, and a 210% probability of a 25bp rate
hike in 6 months time. Higher inflation expectations and forecasts
of an uptick in US interest rates are fuelling local interest rate
expectations.
Forward rate agreements are pricing in a 61% probability of a
25bp rate hike at this weeks MPC meeting, a 121% chance of a 25bp
rate hike in 3 months time, and a 190% probability of a 25bp rate
hike in 6 months time (greater than 100% implies larger or more
frequent hikes). The longer end expectations have softened
marginally.
HIKE
INFLATION DRIVERS
(40%)
Food prices Food price inflation is expected to contribute to
upside inflation
pressures. This is despite the continued moderation of global
food
prices and a recent declining trend of food price inflation at
the CPI
level and lower meat price inflation at the producer price
level.
Maize prices have remained buoyant on import parity pricing.
Since the May MPC, the maize price has risen by a further 16.3%.
and on a y/y basis, is up by a staggering 97.6%. A recent rally in
US corn has exacerbated the short term price action. Higher food
prices will likely come through to headline inflation from Q4 2015
onward.
HIKE
Rand exchange rate
The rand continues to be vulnerable to the ebbs and flows of
global risk perceptions and associated capital flows, particularly
in response to anticipated changes to US monetary policy. At the
same time, there is a great deal of uncertainty regarding the
extent to which US monetary policy normalisation has been priced
into the rand. However, past patterns suggest that some further
pressure is likely on the exchange rate and long bond yields as the
start of the US tightening cycle becomes more certain.
The rand weakened by around 5% against the USD (and 2.3% on a
trade-weighted basis) since the last MPC meeting, but remains 17.3%
weaker y/y (-3.9% on a trade weighted basis). The rand has remained
highly volatile as a result of the volatile dollar, which is
expected to persist until the US confirms a rate hike.
HOLD
Administered prices
the application by Eskom for a further 12,6 per cent increase
from 1 July 2015 will be decided at the end of June. Given the
uncertainty regarding this decision, both in terms of quantum and
timing of implementation, it has not been incorporated into the
forecast, but poses a significant upside risk. Should Nersa fully
accede to the Eskom request, a higher peak of headline inflation as
well as a more extended breach of the target can be expected. The
direct and indirect effects of such an increase could increase
average inflation by around 0,5 percentage points over a year.
Since the last MPC meeting, the petrol price is R0.88/l higher.
Given NERSAs rejection of Eskoms application and notwithstanding
Eskoms intention to re-lodge, the near term pressures of higher
electricity prices has abated and will likely be pushed out to the
latter part of 2016 (if granted).
HOLD
Wage settlements
Trends in remuneration growth remain a concern to the MPC.
Average wage and salary growth has been in excess of inflation for
some time, imparting some degree of automatic indexation to wage
settlements, and therefore maintaining higher levels of
inflation.
Entrenched expectations and a still fractious labour market
continue to weigh on sentiment. Upside wage pressures in excess of
inflation remain a concern.
HIKE
Source: SARB, Nedbank
Interest rate barometer | 21 July 2015 Page 4 of 4
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