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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 (17/07/2014) as well as
developments since the previous meeting which could influence Thursdays
MPC rate decision. The factors are rated 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, 8 support expectations for an unchanged
policy, 3 favours a rate cut, while 2 factors favour a rate hike (see Table 2).
Using the weightings, there is 63% bias for rates to be unchanged, a 20%
bias for rates to be cut, and a 17% bias for rates to be hiked.
Nedbanks view is for rates to remain steady at this weeks MPC meeting,
after the 25 basis point hike in July. Inflation has moderated since our last
Interest Rate Barometer, but growth still remains benign, leading to
expectations for no move this week.
The SARB could consider a hike of 25 basis points at the November policy
meeting, but this remains largely dependent on the inflation trajectory and
the rand. However, the probability of the SARB pushing out the hiking cycle
has risen, given the current weak growth outlook.
Table 1
Factors Outlook at July policy meeting Recent developments Rate
impact
GLOBAL
ECONOMY (20%)
Growth
The global economy continues to exhibit mixed
signals regarding the economic growth outlook. Since
the previous meeting, consensus forecasts for growth
in 2014 have been revised down for the US and the
Eurozone, but those for Japan and the UK have been
revised upwards. The outlook for emerging markets
remains relatively subdued, but some emerging Asian
economies have benefited from stronger US growth.
Subdued growth is expected in a number of emerging
markets including Brazil, Russia, Thailand and
Argentina.
The IMF cut its global growth forecast to 3.4% for 2014
from 3.7% as a result of lower growth expected from
advanced economies. The IMFs view on the US continued
to deteriorate with a downward revision from 2.8% to
1.7%. The Eurozone was expected to grow at 1.1% this
year, unchanged since previous, while the 2015 outlook
has been raised by 0.1% to 1.5%. Emerging market
economies as a collective were downgraded to 4.6% from
4.8% previously with tightening financial conditions
highlighted as a headwind.
HOLD


Inflation and
interest rates
By contrast to a number of emerging market
economies, inflation remains benign in the advanced
economies, although the risk of deflation in the
Eurozone persists. The UK is expected to be the first
advanced economy to raise interest rates, but at a
moderate pace, while the US is generally not
expected to begin the process of normalisation
before the third quarter of 2015.
Inflation in the developed world remains subdued, while
emerging markets have been battling price pressures.
Recently, the Fed and the BOE have seen increased debate
for an earlier than expected rate hike, with two members
voting for a hike at the August BOE meeting, but much
slack still remains in the respective labour markets, which
will need to be reduced to accommodate higher rates.
Monetary policy remains mixed in emerging markets.
HOLD


Oil price Despite recent geopolitical risks, particularly in the
Ukraine and Iraq, international oil prices have
remained relatively stable. Following the
appreciation of the rand in April, the petrol price was
reduced by a total of 37 cents per litre in May and
June, but this was largely reversed in July when the
price increased by 31 cents per litre. Should current
trends persist; a further small increase in the petrol
price can be expected in August.
Oil prices have declined by 8.6% since the last MPC
meeting in July, and traded within a $96/bbl - $109/bbl
range. The EIA has cited rising supplies from the US and
Libya as the main reason the market remains well-
supplied, while demand forecasts have been downwardly
revised due to a slowdown in China.

CUT
DOMESTIC
ECONOMY (40%)
SARBs GDP
forecast
The economic growth outlook has deteriorated
against the backdrop of protracted strike action in
the mining and manufacturing sectors and the
outlook remains subdued. The Banks forecast for
GDP was downwardly revised to 1.7% for 2014
(previously 2.1%) and 2.9% in 2015 (previously
3.1%).


SA real GDP growth rose to 0.6% q/q in 2014/Q2, from a
contraction of 0.6% in the first quarter. The weak GDP
print was mainly the result of a larger than expected
decline in mining and manufacturing output, which
subtracted 0.4% and 0.3% from the headline figure
respectively.
The outlook remains murky. Recent economic indicators
suggest that the weakness continued into the third
quarter, with the NAAMSA strike disrupting manufacturing
output throughout July.
CUT

16 September 2014
Nedbank Capital Strategic Research
Mohammed Yaseen Nalla, CFA
+27 11 295 5430
MohammedN@Nedbankcapital.co.za
Reezwana Sumad
+27 11 294 1753
ReezwanaS@Nedbank.co.za
https://www.nedbankcapitalresearch.co.za
Nedbank Capital
Interest rate barometer | 16 September 2014 Page 2 of 4
Table 1 (continued)
Factors Outlook at July policy meeting Recent developments Rate
impact
DOMESTIC
ECONOMY
(40%) (Contd)
Domestic supply The manufacturing sector performance in the first two months
of the second quarter has also been disappointing, following the
4.4% contraction in the first quarter. The sector was negatively
impacted by electricity supply constraints and the platinum
sector strike, as well as the metalworkers strike. The Kagiso PMI
registered a slight improvement in June, measuring 46.6 index
points, but has remained below the neutral 50 index point level
for three consecutive months.
Mining production declined by 7.7% y/y in July, from -5.4% in
June, much worse than expectations of -6.7%. The biggest
contributors towards the contraction had been platinum, diamond
and gold production, contributing a cumulative -13.6%.
Manufacturing production declined by 7.9% y/y in July, from
growth of 0.2% in June, worse than expectations of -5.8%. This was
the largest contraction since October 2009. The largest contractions
came from the basic iron and steel sector, and the autos sector.
HOLD


Domestic
demand
Domestic motor vehicle sales declined by 2.3% on a year-on-
year basis, but increased by 4.7% on a month-to-month basis in
June. Despite these weak trends, consumer confidence surprised
on the upside in the second quarter, with the FNB/BER consumer
confidence index increasing from -6 to 4 index points, although
respondents do not deem the present time as appropriate to buy
durable goods.
SA vehicle sales declined by 1.4% y/y in August, from a 1.5% decline
in July, as passenger vehicles declined while commercial vehicles
were higher. SA retail sales remained flat on an annualised basis in
June, from a 2.6% increase in May. This was the weakest
performance since December 2009, as households remained
pressured by higher debt servicing costs, elevated unemployment
and price pressures.
CUT

Monetary
conditions
Growth over twelve months in total loans and advances to the
private sector measured 8.2% in May 2014, but the divergent
trends in bank credit extended to households and the corporate
sector have continued. Growth in credit extended to the
corporate sector has been steadily increasing since the beginning
of the year, measuring 13.3% in May, due in part to renewable
energy contracts. By contrast, growth in credit extended to the
private sector has continued to trend downwards, to measure
4.3% in May.
Private sector credit extension growth accelerated to 9.8% y/y
from 8.6% in June. Companies remained the main driver of credit
demand (up by 1.4% m/m and 17% y/y), with the annual growth
rate being the strongest since September 2008. Household debt to
disposable incomes remains elevated, constraining their ability to
take on more debt.
Overall credit is likely to remain subdued; maintaining a weak
outlook for domestic demand, suggesting the absence of demand
pull inflation is likely to persist.
HOLD


Forecast of
inflation
Inflation is now expected to average 6.3% in 2014, compared
with 6.2% previously. The forecast for average inflation for 2015
increased to 5.9% from 5.8%, while the forecast for 2016
increased marginally to 5.6%, and to 5.5% in the final quarter of
that year. Inflation is still expected to return to within the target
band during the second quarter of 2015.
Nedbank expects CPI at a level in line with the SARB, with an
average of 6.3% forecast in 2014 and 6.0% in 2015.The forecast was
downwardly revised from 6.4% previously expected for 2014.

HIKE

Market
expectations
Forward rate agreements were pricing in a 51% probability of a
50bp rate hike at the last MPC meeting (or a 102% chance of a
25bps hike), an 89% chance of a 50bp rate hike in 3 months
time, and a 137% probability of a rate hike in 6 months time.
Forward rate agreements are pricing in a 19% probability of a
50bp rate hike at this weeks MPC meeting (or a 38% chance of a
25bps hike), a 49% chance of a 50bp rate hike in 3 months time,
and a 95% probability of a 50bp rate hike in 6 months time.
HOLD

INFLATION
DRIVERS (40%)
Food prices Food prices have been one of the main drivers of inflation since
the beginning of the year and have generally surprised on the
upside in recent months. There are, however, some tentative
indications that we may be near the peak as maize and other
grain prices declined. Apart from weather-related risks, the
overall trend in food prices will remain highly sensitive to
exchange rate developments.
SA CPI moderated to 6.3% y/y in July, from 6.6% in June, beating
both Nedbank and the consensus forecasts of 6.4%. The main
reason for the slowdown in inflation came from transport inflation,
which decreased to 6.9% y/y in July, from 8.6% previously.
Despite CPI food remaining unchanged at 8.8% y/y in July, food
inflation is likely to ease in the coming months, supported by
lower wheat (flat in August after falling 1.28% in July) and maize (-
4.5% in August 2014) prices.
HOLD

Rand exchange
rate
The rand has largely decoupled from its emerging market peers,
and depreciated relative to most currencies, as it reacted to
deteriorating domestic fundamentals. The exchange rate of the
rand continues to pose an upside risk to the inflation outlook.
Since the previous meeting the rand has depreciated by 2,6 % on
a trade-weighted basis.
The rand weakened by 2.85% against the USD (and 1.12% on a
trade-weighted basis) since the last MPC meeting, mainly due to a
risk-off scenario currently being played out across EMs. Uncertainty
regarding an earlier-than-expected Fed hike has been the major
reason for the risk aversion. Outflows in the bond market have
exacerbated the currency weakness across EMs and in SA.
HOLD

Administered
prices
Administered price inflation ticked back up to 8.9% y/y in May
from 7.4%y/y in April and remained significantly above the 6%
level with continued upside risk from higher electricity costs. CPI
transport also ticked up to 8.9% y/y in May from 6.8% y/y in
April. The petrol price was cut by 15c in May but is currently
exhibiting a material under recovery as the rand weakened and
oil prices rose.
Administered price inflation fell to 7% y/y in August, from 8.6% in
July, mainly on the back of lower transport costs as a result of the
lower oil price. The petrol price was cut by 67-cents/litre in August,
the biggest cut in 15 months.
Upside risks in the form of NERSA price hikes in 2015 could likely
place some pressure on overall administered prices in the medium
term.
HOLD

Wage
settlements
The trend in wage settlements pose an upside risk to the
inflation outlook and these pressures are likely to intensify in the
current difficult labour relations environment. According to
Andrew Levy Employment Publications, the average wage
settlement rate in collective bargaining agreements increased
from 7.9% in the first quarter of 2014 to 8.1% in the second
quarter.
Wage settlements in excess of inflation threaten to reduce SAs
global competitiveness, should this not be met with productivity
gains. Upcoming public sector wage negotiations could likely see
wage increases in excess of CPI, placing further upside pressure on
overall inflation
HIKE
Source: SARB, Nedbank
Table 2: Probability of outcomes
Impact Unweighted Probabilities Weighted probabilities
Global economy (20%) Cut 33% 7%
Hold 67% 13%
Hike 0% 0%
Domestic (40%) Cut 33% 13%
Hold 50% 20%
Hike 17% 7%
Inflation drivers (40%) Cut 0% 0%
Hold 75% 30%
Hike 25% 10%
Final Result Cut 23% 20%
Hold
62% 63%
Hike
15% 17%
Source: Nedbank
Nedbank Capital
Interest rate barometer | 16 September 2014 Page 3 of 4

UK and US start positioning for policy normalisation

EM policy response remains mixed among EMs



SA lags behind key EMs in terms of growth

SA PMI points to slower contraction in manufacturing
output expected




FRAs price in 38% probability of a 25bp rate hike

Lower Brent price results in local petrol price cut



SARB policy dilemma persists

SA real repo rate remains accommodative despite hikes



Source: I-Net, Bloomberg, Stats SA, Nedbank


19%
49%
93%
153%
181%
243%
0%
50%
100%
150%
200%
250%
300%
1X4 3X6 6X9 9X12 12X15 18X21
FRA Market - Probabilities
Probability of 50bps move


Interest rate barometer | 16 September 2014 Page 4 of 4
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