South Africa holds key interest rate at six percent

The Reserve Bank today published a report detailing how it estimates New Zealand’s neutral interest rate. The time for a further 25-bps rate cut is appropriate now.

Economic growth slowed in the second quarter and consumer prices were unchanged in August from the year-ago period, buttressing the central bank’s guidance, according to Nora Szentivanyi, an economist at JPMorgan Chase in London. “However, South Africa has hiked interest rates by 1.00% in its current upwards interest rate cycle, with 25 basis points this year to date, and a hawkish [favouring high interest rates to target inflation] tone”.

Turkey’s central bank governor said last month that Ankara would move in tandem with policy makers in Washington to counter the fallout from a Fed decision to reverse its extraordinary monetary easing. In a series of public comments over recent days, he has been a strong voice in support of the central bank’s Federal Open Market Committee raising its short-term interest rate from now near zero levels.

If RBI was to take the signal from the market (the direction of causality-whether RBI adjusts rates based on demand and supply or vice versa-is not known), sustained positive net injection is a suggestion to raise rates.

Since then, consumer inflation sank to a record low of 3.66 percent in August, over two percentage points lower than the central bank’s Jan 2016 target, while annual economic growth slowed to 7.0 percent in the quarter ending June.

“The cycle has turned, the currency is collapsing, and the central bank can just soften the blow”, said Wouter Sturkenboom, investment strategist at Russell Investments in London, which oversees around $265 billion in assets. The MPC also judged the domestic monetary policy stance as still very accommodative in the context of a contracting non-energy sector and moderate inflationary pressures.

While most Wall Street pros still think the Fed will hike rates later this year (the Fed meets again in October and also has a December meeting), the focus will soon shift to the economy and business fundamentals, both at home and around the globe, says Russ Koesterich, chief global investment strategist at BlackRock.

“The probability of a more extended breach than now forecast remains high”, he said. And he is determined to continue his war on inflation, even if the industry cries it hampers growth. The economy now needs a push for reaching the targeted gross domestic product growth of 8-8.5 per cent in 2015-16.

“The National Bank sticks to its neutral bias with rates to remain on hold for a prolonged time, but if the inflation outlook declines further with the global growth environment deteriorating, the interest rates may be the key channel for MNB to react”, Eszter Gargyan, a Citigroup analyst, told Reuters.