Interest rates likely to remain at 7% - economist

Cape Town – Despite the rand’s resilience in the face of the US Federal Reserve (the Fed) rate hike earlier this month, South Africa’s interest rates are likely to remain at 7%, said BNP Paribas economist Jeffrey Schultz in a company note. 

The Monetary Policy Committee of South African Reserve Bank (SARB) is scheduled to have its policy meeting on Thursday March 30 and is unlikely to change the policy rate. Interest rates have been kept at 7% for 11 consecutive months and Reserve Bank governor Lesetja Kganyago is unlikely to bow to pressure to call the top of the hiking cycle just yet, Schultz opined. 

“Since the Monetary Policy Committee met in January, both the global and the domestic macroeconomic environment have not really changed a great deal. Front of mind for the SARB however will be the rand’s resilience to a US Fed rate hike earlier this month, which has actually shown the currency strengthen against the US$ in real effective terms as well as among most of its emerging market peers.” 

The global commodity price environment has been relatively favourable, Schultz said, and the SARB balance of payments which reflected a narrowing in the current account deficit reaching a six-year low in the fourth quarter of 2016 will also provide the monetary policy committee with some “comfort”.

In January at its previous policy meeting the SARB cited gains in the international oil price and “the sticky nature of domestic food prices” as upside risks to inflation. But since then the rand has strengthened by more than the average gain in Brent crude oil prices and food and core price momentum have softened somewhat.

READ: Interest rate cut on the cards - economist 

“All of this we believe should allow the Bank to revise down its more hawkish 6.2& average inflation forecast for 2017 that it presented in January,” Schultz said. “We also believe there is a strong case for the Bank to revert back to its expectation from late last year for headline CPI to slip back sustainably below its upper 6% inflation target by the second quarter this year.”

Despite the positivism, the outlook for the US$ remains uncertain and concerns about the US presidency under Donald Trump about the implementation of promised policy initiatives are still present, which could put pressure on the greenback.

“Furthermore, markets continue to toy with the notion that the Fed is already behind the curve in tightening the policy in an environment of rising inflation,” Schultz said.

READ: Markets cheer US interest rate hike 

“The extent of the ‘dot plot’ (the quarterly summary of Fed officials’ economic projections whereby each participating official plots his or her expected path of interest rates on a chart) evolves higher over the coming months will determine whether or not the rand is likely to come under renewed selling pressure or strengthen further."