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3 reasons why Reserve Bank unlikely to hike rates, say economists

Jan 15 2019 12:05
Carin Smith

There are three reasons why the Monetary Policy Committee of the SA Reserve Bank is unlikely to raise interest rates on Thursday, according to PwC.

At its previous meeting in November 2018, the MPC announced a 25-basis points increase in the repo rate. This was the first increase since March 2016 and brought the repo rate and prime lending rates to 6.75% and 10.25%, respectively.

The repo rate is the benchmark interest rate at which the central bank lends money to other banks. Changes in the repo rate affect the prime lending rate, which is the rate banks use as a starting point to calculate interest rates for their clients.

In an analysis on Monday, PwC said the central bank was unlikely to again raise rates on Thursday for three reasons. 

  • Fears around the global economy fears are dampening oil prices and offering a petrol price reprieve;
  • "US equities jitters" may slow down the pace of the US Fed's monetary policy tightening; and
  • The SA economy remains at a crossroads, with weak demand pressures. 

Don't raise now, raise later 

While the SARB is unlikely to raise rates on Thursday, PwC noted that the central bank had signalled at the beginning of the interest rate hiking cycle in November that it may raise rates three times by 25 bps each before the end of 2020.

"An increase of 25 bps remains on the cards in the short term if risks to the inflation outlook materialise," states PwC.

These risks include above-inflation domestic wage growth as well as rising electricity and water tariffs. Furthermore, rand vulnerability poses on ongoing risk to the inflation outlook.

Investec economist Annabel Bishop, in a note to clients, said interest rates would remain unchanged for the first half of 2019.

"However, global risks still abound, with Brexit negotiations and the US government shutdown ongoing, both of which have the potential to elevate risk aversion, and so weaken emerging market currencies," Bishop said in a statement.

"Contrary to the timing of the last MPC meeting in November 2018, the start of 2019 has seen risk-aversion abate somewhat in global markets as commentary from US monetary authorities has become less hawkish."

"Concerns over global - and hence SA - growth have come to the fore, as has the recent weakness of global markets."

Domestically, risks for SA abound, said Bishop, ranging from fiscal performance and the threat of credit rating downgrades, to the upcoming national election. 

Nedbank Corporate and Investment Banking also said it expected the central bank to keep interest rates on hold on Thursday.

"We continue to expect hawkish language, which on balance should support the rand in an environment where the Fed has turned more dovish," says Nedbank.

"We see marginally lower headline inflation in 2019, but believe the bias is still for a hike by the SARB later this year."

sarb  |  interest rates  |  sa economy  |  mpc
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