Strategic Research| South Africa

G LOBAL M ARKETS

21 July 2015

Interest Rate Barometer

Executive Summary

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

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

GLOBAL

Factors

Outlook at the May policy meeting

Recent developments

Rate
impact

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 commodityproducing 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

ECONOMY
(20%)

Important disclosures can be found in the disclaimer

Nedbank Capital
Table 1 (continued)

GLOBAL

Factors

Outlook at the March policy meeting

Recent developments

Rate
impact

Oil price

The international oil price appears to have stabilised in the US$60US$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

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.

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

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 tradeweighted 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

ECONOMY
(20%)
(Contd)
DOMESTIC
ECONOMY
(40%)

INFLATION
DRIVERS
(40%)

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.

Source: SARB, Nedbank

Interest rate barometer | 21 July 2015

Page 2 of 4

Nedbank Capital
Table 2: Probability of outcomes
Impact
Global economy (20%)

Unweighted Probabilities

Weighted probabilities

Cut

0%

0%

Hold

100%

20%

Hike

0%

0%

Domestic (40%)

Cut
Hold
Hike

33%
33%
33%

13%
13%
13%

Inflation drivers (40%)

Cut
Hold
Hike

0%
50%
50%

0%
20%
20%

Final Result

Cut

15%
54%
31%

13%
53%
33%

Hold
Hike
Source: Nedbank

US core inflation remains close to Fed target

Brent heads lower as global supply glut persists

Trade weighted rand testing resistance

SA PMI back into expansion in short term, trend weak

FRAs expectations have softened a little

SA maize prices almost double over 12 months

FRA Probabilities
300.00%
250.00%
200.00%

3X6
6X9
9X12

150.00%
100.00%
50.00%
0.00%

CURRENT

21-May

26-Mar

Source: Bloomberg, SARB, Nedbank

Interest rate barometer | 21 July 2015

Page 3 of 4

Analyst Certification
Each research analyst principally responsible for the preparation and content of all or any identified portion of this research report ("Report") hereby certifies that, with respect to each company or
security or any identified portion of the Report with respect to a company or security that is discussed by the research analyst in this Report, all of the views expressed in this Report accurately reflect
his/her personal views about that company or securities as at the date of this Report.
Views expressed in respect of a particular company or security in this Report may be different from, or inconsistent with, the observations and views of other research analysts due to the differences in
evaluation criteria.
Further, each research analyst certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by him/her in this
Report.
Potential Conflicts of Interest
Research analysts employed by Nedbank Limited (acting through its Nedbank Capital division) ("Nedbank") or its ultimate holding companies or any direct or indirect subsidiary undertakings of such
holding companies affiliates ("Affiliates")(collectively, the Group) are compensated from revenues generated by various members of the Group. Research analysts do not receive compensation based
upon revenues from specific transactions. In respect of the securities of a company that such research analyst covers, the Group generally requires that research analyst and any member of his/her
household to disclose any trades and holdings in such securities. In addition, Group policy requires that research analysts make written disclosure to their employer if they serve as an officer, director or
advisory board member of a company that he/she covers.
The Group comprises a full service investment bank and a commercial bank engaged in providing investment banking, asset management, financing, financial advisory services and other commercial
and investment banking products and services to a wide range of corporations and individuals. In the ordinary course of the Group's trading, brokerage, asset management and financing activities, any
member of the Group may, at any time, hold ownership positions of [up to] 1% of any of the companies mentioned in this Report, may deal as principal or agent for more than one party in, or hold
short positions, long positions of less than 1%, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of third parties or
any other person that may be involved in a transaction/project in connection with a company or securities referenced in this Report. The Group recognises its responsibility for compliance with relevant
securities laws in relation to such activities and has implemented the required information barriers and control systems in respect thereof.
In addition, the Group may have and may in the future have investment and commercial banking, trust and other relationships with parties other than the companies mentioned in this Report, which
parties may have interests with respect to the companies and the securities referred to herein. Members of the Group, in the course of such other relationships, may acquire information about the
companies and/or securities mentioned herein or such other parties. Be advised that no member of the Group shall have an obligation to disclose any such information, or the fact that any member of
the Group is in possession of such information, to the recipients of this Report. Furthermore, members of the Group may have fiduciary or other relationships whereby such member may exercise
voting power over securities of certain companies, which securities may from time to time include securities of the companies referred to herein.
Recipients of this Report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.
Disclaimer and Copyright
This Report is not directed to, or intended for use by or distribution to, directly or indirectly, in whole or in part, any person or entity who is a citizen or resident of or located in any locality, state,
country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject any member of the Group to any registration or
licensing requirement within such jurisdiction.
This Report has been issued or approved for issue by a representative of Nedbank and has been forwarded to you solely for information purposes and for your consideration. The information contained
in this Report is confidential and is not intended to be, nor should it be construed as, "advice" as contemplated in the Financial Advisory and Intermediary Services Act, 2002 or otherwise, or a direct or
indirect invitation or inducement to any person to engage in investment activity relating to any securities or any derivative instrument or any other rights pertaining thereto of any company mentioned
herein (financial instruments).
Information and opinions presented in this Report were obtained or derived from public sources that Nedbank believes are reliable but makes no representations as to their accuracy or completeness.
Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent
with any such opinions, forecasts or estimates. Past performance should not be taken as an indication or guarantee of future performance and no representation or warranty, express or implied is
made regarding future performance. The price, value of and income from any of the financial instruments mentioned in this Report can fall as well as rise. Certain transactions including those involving
futures, options and other derivative instruments can give rise to substantial risk of loss and are not suitable for all investors. Before entering into any transaction, you should independently take advice
on and evaluate the risks and potential benefits of the transaction. Opinions, forecasts and estimates expressed in this Report are subject to change without notice and may differ or be contrary to
opinions, forecasts and estimates expressed by other business areas in the Group as a result of using different assumptions and criteria. Furthermore, the Group (including each member's directors,
employees, representatives and agents) accepts no responsibility or liability (whether in delict, contract or otherwise) for any loss arising from the use of or reliance placed upon the material presented
in this Report, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to any member of the Group.
In addition, members of the Group may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this
Report. Those reports reflect the different assumptions, views and analytical methods of the research analysts who prepared them and Nedbank is under no obligation to ensure that such other reports
are brought to the attention of any recipient of this Report. Members of the Group may be involved in many businesses that relate to companies and financial instruments mentioned in this Report.
Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration. The
information contained in this Report may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis
of every material fact representing any product, company or financial instrument. Any estimates included herein constitute the judgment of the research analyst as of the date hereof and are subject
to change without any notice.
This Report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the Report refers to website material of Nedbank, Nedbank has not reviewed the linked site
and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to Nedbanks own website material) is provided solely for your convenience
and information and the content of the linked site does not in any way form part of this Report. Accessing such website or following such link through this Report or Nedbanks website is entirely at
your own risk
Directors, officers and/or employees of any member of the Group may at any time, to the extent permitted by law, own or have a position in the financial instruments of any company or related
company referred to herein, and may add to or dispose of any such position or act as a principal in any transaction in such financial instruments. Nedbank and/or its Affiliates may make a market in
these instruments for its customers and for its own account. Accordingly, Nedbank and/or its Affiliates may have a position in any such instrument at any time. Directors, officers and/or employees of
Nedbank and/or its Affiliates may also be directors of companies mentioned in this Report. Nedbank and/or its Affiliates may from time to time provide or solicit investment banking, underwriting or
other financial services to, for or from any company referred to herein. The financial instruments referred to may not be suitable for the specific investment objectives, financial situation or individual
needs of recipients and should not be relied upon in substitution for the exercise of independent judgement. It is recommended that you obtain independent advice if you are in doubt about such
investments or investment services. This Report is intended for use by professional and sophisticated business investors only.
This Report is not intended for use by, or distribution to, persons in the United States that do not meet the definition of a major US institutional investor under Rule 15a-6 under the US Securities
Exchange Act of 1934 (Rule 15a-6). The financial instruments described herein may not have been registered under the US Securities Act of 1933 (the Securities Act) and may not be offered or sold
in the United States unless they have been registered under the Securities Act, or pursuant to an exemption from, or in transactions not subject to, the registration requirements of the Securities Act,
and in compliance with any applicable securities laws of any state or other jurisdiction of the United States. Any US persons or recipients of this Report located in the United States that are interested in
trading financial instruments referred to in this Report should only effect such transactions through a US-registered broker-dealer.
The distribution of this Report in certain jurisdictions may be prohibited or restricted by rules, regulations and/or laws of such jurisdictions and persons into whose possessions this presentation comes
should inform themselves about and observe any such restrictions. Any failure to comply with such prohibitions or restrictions may constitute a violation of the laws of such other jurisdictions.
All material presented in this Report, unless specifically indicated otherwise, is under copyright to Nedbank. None of the material, nor its content, nor any copy of it, may be altered in any way,
transmitted to, copied or distributed to any other party, without the prior written permission of Nedbank. All trademarks, service marks and logos used in this Report are trademarks or service marks or
registered trademarks or service marks of Nedbank or its Affiliates.
2014 Nedbank Limited

Interest rate barometer | 21 July 2015

Page 4 of 4