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Rates move 'too close to call' amid rand rout, petrol pain and ailing economy

Sep 17 2018 19:13
Lameez Omarjee

The consensus among economists is that the repo rate will be kept on hold at 6.5% when the Reserve Bank’s Monetary Policy Committee (MPC) meets this week.

However, they have also indicated that the hiking cycle may be brought forward, given pressures on the rand. 

Independent economist Thabi Leoka said a lot had happened since the last MPC meeting in July, including that the rand had breached the R15/$ mark on the back of developments in Turkey and other emerging markets.

Leoka said that it was unlikely the bank would cut rates.

Maarten Ackerman, chief economist at Citadel, expects rate hikes only to be introduced in 2019, when the pressure of inflation is felt. Currently inflation is within the target band of 3% to 6%, but it will likely breach the upper limit in 2019, he explained.

The Reserve Bank won’t be able to drop interest rates to support the economy, which is currently in recession, as inflation is a problem, he said. 

'Too close to call'

In a weekly update on the economy, FNB chief economist Mamello Matikinca said it was too close to call the bank's decision on rates.

"While we are not convinced that the SARB will hike the repo rate at this meeting, we acknowledge that the timing of a hike has been dramatically brought forward," she said.

The Reserve Bank is expected to be far more hawkish in its tone, which could suggest a rate hike at the MPC meeting in November, she said.

Old Mutual Investment chief economist Johann Els is also of the view that the Reserve Bank will be more hawkish. "The Reserve Bank will be worried about inflation risk from the weaker currency and from the higher petrol price."

At the same time, the weaker currency and higher petrol price will contribute to the MPC likely not opting for a hike this time.

"The economy is very weak and the higher petrol prices will actually mean people have less money to spend elsewhere. This will drive consumer goods inflation numbers," Els said.

Hike in the fourth quarter?

Investec chief economist Annabel Bishop believes that a 25-basis point hike will be introduced at the next meeting, as second-round effects of inflation have emerged. Investec has brought forward its forecast that a rate hike will only be introduced in the fourth quarter of the year.

The rand weakness has raised the probability of the SARB hiking rates earlier than expected, said PwC’s economist Maura Feddersen.

However, PwC only expects the first interest rate hike to happen in the fourth quarter if the "current global environment persists" and if the rand remains under pressure. PwC has brought forward its forecast from the first quarter in 2019.

It also expects an upward adjustment on inflation expectations and a downward revision of growth.

At the July meeting, the MPC revised down the growth rate of 1.7% for 2018 to 1.4% following the first quarter’s contraction.

"To achieve the SARB’s July expectation of economic growth of 1.2% in 2018, South Africa’s economy would have to expand by an unrealistic 1.8% on average in the second half of the year," said Feddersen.

A rate hike at this meeting is unlikely given the weak economic growth outcomes, Feddersen explained.

The decision on the repo rate will be announced on Thursday afternoon.

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