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South African Reserve Bank

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Working Paper– WP/16/09: Qualitative Guidance and Predictability of Monetary Policy in South Africa
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Alain Kabundi and Ntuthuko Tsokodibane
Working Papers

This paper investigates the impact of rising cycle talk on the predictability of the likely future path of the policy rate in South Africa. Throughout 2014 the South African Reserve Bank (SARB) explicitly communicated that monetary policy was on a rising cycle until normalisation is reached. Given that the "rising cycle" talk occurred early in 2014, we compare the forecasts in 2013 to those in 2014. We use two sources of expectations, the survey of economic experts obtained from Thomson Reuters and the Forward Rate Agreements (FRAs) which represent the expectations of the financial market participants. The results based on descriptive analysis and a nonparametric change points model confirm the influence of the "rising cycle" talk in shaping expectations of both economic experts and financial market participants on the future path of the reaction function of the SARB. Besides the surprise effects of January 2014, agents clearly predicted subsequent rate hikes based on the guidance received from the SARB. Previous rising interest rate cycles do not portray the same degree of predictability by analysts.

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