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Risk of SARB hiking interest rate sooner now - economist

May 25 2018 20:35
Carin Smith

There is a risk of the monetary policy committee (MPC) of the South African Reserve Bank (SARB) hiking interest rates sooner than the second half of 2019, as previously forecast by FNB, according to its chief economist Mamello Matikinca.

This is due to oil hovering at $80 per barrel and emerging market currencies coming under pressure from a strong dollar.

The MPC decided on Thursday to keep the repo rate the same at 6.5%.

While April inflation jumped to 4.5% from 3.8% in March after the 1% VAT hike, FNB expects headline inflation to remain relatively contained over the next twelve months.

"SARB’s concerns over the growing risks to the inflation outlook were evident in the tone of the governor’s speech, which was decidedly more hawkish than past meetings," said Matikinca.

"Barring any currency or oil price shocks, however, we expect the central bank to keep interest rates on hold throughout 2018.”

Luigi Marinus, portfolio manager at PPS Investments, said to better understand the conundrum of the MPC being unwilling to cut interest rates at this stage, one needs to consider the expectations of the factors at play.

Firstly, with the oil price closer to $80 per barrel, it will lead to fuel price hikes placing additional pressure on inflation. The rand is unlikely to dampen this effect.

Secondly, the US is in a rate hiking cycle and it could prove difficult to move against this trend, especially for emerging market economies.

"These factors could very well spell the end of a short rate cutting cycle in South Africa," said Marinus.

Jameel Ahmad, global head of currency strategy and market research at FXTM, said setting interest rate policy is not a straightforward task. This is due to the many different external factors that can impact the local market at any given point, with this especially being the case for the rand.

"The market dynamics over the upcoming months are also likely not to be too kind for the SARB, with the central bank likely to be pressured between battling weak economic growth and rising price pressures in SA."

Investec economist Lara Hodes said the SARB governor Lesetja Kganyago’s rates announcement had a less dovish tone this time around, as the balance of risks to the inflation outcome have increased since the MPC last met in March.
 
"These risks include the pace of global monetary normalisation by the Fed (US Federal Reserve), which could continue to have a negative effect on capital flows into South Africa, causing further sustained depreciation in the rand," said Hodes.

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sarb  |  interest rates  |  sa economy
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