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Cape Town - It is not a foregone conclusion that the South African Reserve Bank’s monetary policy committee (MPC) will increase interest rates on Thursday afternoon, despite several warnings by governor Gill Marcus that SA is at the beginning of a period during which interest rates will rise.
The Reserve Bank will announce the outcome of the MPC’s deliberations at around 15:00. The bank kept its repurchase rate – the so-called repo rate - unchanged at its previous two meetings after a surprise hike at the beginning of the year.
The repurchase rate is the rate at which the Reserve Bank is willing to buy bonds back from investors, and sets the cost of money in capital and money markets.
Any change in the repo rate filters through the banking system within days, and affects disposable income of just about every person in SA.
Different polls asking local economists their opinions showed these experts are split on their views of whether there will be a hike. About half expect an increase of either 25 or 50 basis points, with the rest expecting no increase.
The most compelling reason for Reserve Bank to keep rates low is that the economy is growing at a much much slower rate than was predicted at the beginning of the year, a mere seven months ago.
The strike by workers in the metals and engineering sector will damage economic growth further, after the disruptive strike in the platinum industry.
Reasons to support an interest rate hike include that consumer inflation is still outside the upper limit of the Reserve Bank’s target rate of 3% to 6%, while producer inflation is even higher.
Producer inflation of more than 8% is not good news for consumer prices a few months down the line.
Make profit from Sarb's rates decision
Derivative trading company Global Trader, owned by the JSE-listed Purple Group [JSE:PPE], has launched an interesting binary option for speculators who want to take a view on the Reserve Bank's decision.
A binary option is a derivate instrument investors and speculators can use to track changes in shares prices, exchange rates or commodities.
It differs from a normal option in that it has two different strike prices. In the case of a share, it will have one strike price set lower than the share price when the option starts trading, and the second strike price at a price higher than the share price. In short, it is basically an option to either buy or sell a share rolled into a single instrument.
Global Trader’s MPC rate decision binary option offers three different outcomes: the Reserve Bank might decrease the repo, increase it or keep it unchanged. If the repo rate falls, the option will be valued at 0, if it rises, the value will be worth 100 points and if the bank keeps the repo rate unchanged, the option will be worth 60 points.
It is interesting that Global Trader makes a market in this instrument at fixed prices – at 55 points for sellers who believe the interest rate might go down on Thursday afternoon, and at 65 points for buyers who expect a repo rate rise.
If you buy at 65 points and the Reserve Bank does hike the interest rate, your profit will be 35 points (100 - 65 = 35). Buyers can elect how much to wager up to a maximum of R50.
A buyer stands to make profit of R1 750 if his view is correct and the bank does raise the interest rate. If the rate remains the same and the option is priced at 50 points after the announcement, a buyer will show a small loss of 15 points (50 - 65 = -15), or R450 if he elected the maximum risk of R50 per option.
The option is obviously priced in such a way to favour the view that the Reserve Bank will not raise interest rates. If there is no hike, Global Trader as market maker is set to profit 15 points from every long (or short) position in this particular binary option.
If the interest rate does go up, buyers will profit 35 points at the expense of Global Trader.
Thus Global Trader is writing a fair price on the potential outcome of the interest rate decision. The company is risking a potential loss of 35 points if the repo rate increases, against a profit of 15 points if there is no change.
It is correct that the pricing of the option illustrates the rather partial view that the repo rate will not change this time round, said Andrew Kinsey, product design officer at Global Trader.
The view is backed by a rather large bet: if all of Global Traders’ 3 000-plus clients believe that the Reserve Bank will hike the interest rate and they are right, Kinsey will have to request a cheque for about R5m from his financial director.
- Fin24
The Reserve Bank will announce the outcome of the MPC’s deliberations at around 15:00. The bank kept its repurchase rate – the so-called repo rate - unchanged at its previous two meetings after a surprise hike at the beginning of the year.
The repurchase rate is the rate at which the Reserve Bank is willing to buy bonds back from investors, and sets the cost of money in capital and money markets.
Any change in the repo rate filters through the banking system within days, and affects disposable income of just about every person in SA.
Different polls asking local economists their opinions showed these experts are split on their views of whether there will be a hike. About half expect an increase of either 25 or 50 basis points, with the rest expecting no increase.
The most compelling reason for Reserve Bank to keep rates low is that the economy is growing at a much much slower rate than was predicted at the beginning of the year, a mere seven months ago.
The strike by workers in the metals and engineering sector will damage economic growth further, after the disruptive strike in the platinum industry.
Reasons to support an interest rate hike include that consumer inflation is still outside the upper limit of the Reserve Bank’s target rate of 3% to 6%, while producer inflation is even higher.
Producer inflation of more than 8% is not good news for consumer prices a few months down the line.
Make profit from Sarb's rates decision
Derivative trading company Global Trader, owned by the JSE-listed Purple Group [JSE:PPE], has launched an interesting binary option for speculators who want to take a view on the Reserve Bank's decision.
A binary option is a derivate instrument investors and speculators can use to track changes in shares prices, exchange rates or commodities.
It differs from a normal option in that it has two different strike prices. In the case of a share, it will have one strike price set lower than the share price when the option starts trading, and the second strike price at a price higher than the share price. In short, it is basically an option to either buy or sell a share rolled into a single instrument.
Global Trader’s MPC rate decision binary option offers three different outcomes: the Reserve Bank might decrease the repo, increase it or keep it unchanged. If the repo rate falls, the option will be valued at 0, if it rises, the value will be worth 100 points and if the bank keeps the repo rate unchanged, the option will be worth 60 points.
It is interesting that Global Trader makes a market in this instrument at fixed prices – at 55 points for sellers who believe the interest rate might go down on Thursday afternoon, and at 65 points for buyers who expect a repo rate rise.
If you buy at 65 points and the Reserve Bank does hike the interest rate, your profit will be 35 points (100 - 65 = 35). Buyers can elect how much to wager up to a maximum of R50.
A buyer stands to make profit of R1 750 if his view is correct and the bank does raise the interest rate. If the rate remains the same and the option is priced at 50 points after the announcement, a buyer will show a small loss of 15 points (50 - 65 = -15), or R450 if he elected the maximum risk of R50 per option.
The option is obviously priced in such a way to favour the view that the Reserve Bank will not raise interest rates. If there is no hike, Global Trader as market maker is set to profit 15 points from every long (or short) position in this particular binary option.
If the interest rate does go up, buyers will profit 35 points at the expense of Global Trader.
Thus Global Trader is writing a fair price on the potential outcome of the interest rate decision. The company is risking a potential loss of 35 points if the repo rate increases, against a profit of 15 points if there is no change.
It is correct that the pricing of the option illustrates the rather partial view that the repo rate will not change this time round, said Andrew Kinsey, product design officer at Global Trader.
The view is backed by a rather large bet: if all of Global Traders’ 3 000-plus clients believe that the Reserve Bank will hike the interest rate and they are right, Kinsey will have to request a cheque for about R5m from his financial director.
- Fin24
