Factory data 'not market-moving'

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As the data are not expected to move markets, the focus has shifted to more important happenings.

In just more than two weeks' time, the Reserve Bank's monetary policy committee (MPC) will have its first meeting of the year, with interest rates expected to be kept on hold. The main beneficiaries over the short term are set to be consumers, who will have more money in their pockets, but over the long term the effects may not be as advantageous.

Though the Bank has indicated the economy is in a rate-hiking cycle, lower oil prices and some pullback in the weaker rand have created a scenario for rates to be kept on hold for now.

The consumer price index (CPI) rose 5.8% in November, from 5.9% in October and 6.4% in August. It reached a high of 6.5% in the second quarter of last year, prompting the Bank to hike rates by a cumulative 75 basis points for the year - 50 basis points in January and 25 in July. That was somewhat more moderate than envisaged at the beginning of the year as some economists pencilled in hikes of at least 125 basis points for the year. But the good news may not continue indefinitely.

Cannon Asset Managers chief investment officer Adrian Saville said that with consumer price inflation likely to remain in moderate territory, interest rates were expected to stay flat.

Headwinds

The economy is facing notable headwinds. While it was set to benefit from the collapse in the oil price, commodity prices were under pressure, which hurt SA as it relied on commodity exports against the backdrop of a current account deficit, Saville said.

That could prompt the Bank to hike rates in the second half, especially if economic growth improved from the paltry level of last year.

Higher interest rates usually have a dampening effect on growth, which is expected to be only 1.4% for the whole of last year. Growth rates will probably remain well below the rates seen before the global financial crisis, with Capital Economics predicting 2% this year and 2.5% for next year, albeit an improvement on 2014.

Barclays Research said emerging markets were likely to feel the effects of two structural global changes over the next few years - lower growth in China and a slow recovery in Europe. This could hurt the local economy as China and Europe were SA's major trading partners. "We see these slowdowns as structural shifts that will have long-lasting effects‚ especially on the emerging markets that export goods and services to them."

Lower CPI expected

At its last MPC meeting, in November, the Bank indicated CPI was set to come in at 6.1% for 2014, from a previously forecast 6.2%. CPI could reach a low of 5.1% in the second quarter, averaging 5.3% for the year, from 5.7%.

This is good news for consumers, with some economists predicting that CPI can go lower than 5% in the year, even to 4%. The wild card in this scenario is the rand.

Analysts have predicted the rand is to weaken beyond R12/$ over the next three to six months. Barclays Research says it could reach R12.60/$, but recover to R11.50/$. So far it has shown little inclination to weaken dramatically, despite a rampant dollar.

The positive interest rate scenario also depends on continued low oil prices. After dramatically falling about 50% last year, it was initially thought the $60 per barrel level could be the floor in the downward spiral. But after Brent broke through $60, it has now briefly dipped below $50 per barrel, threatening to reach the decade-low of $36 in December 2008.

Researchers at Investec Asset Management said in a note the Brent price was actually due to rise, differing from analysts who say oil prices could remain around present levels for a long time.

"We forecast that Brent oil will average $60, $70, $80 and $85 per barrel in the four quarters of 2015, to give a full-year average of $70-$75, representing 40%-50% upside in the commodity price from present levels," Investec said.

Should that be the case, the Bank may well start to hike rates in the second half of the year.

Source: Business Day via I-Net Bridge