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Some pluses to the rate hike, say economists

Nov 23 2018 16:48
Carin Smith

By increasing interest rates by 25 basis points on Thursday, the SA Reserve Bank (SARB) has taken a widely anticipated step to protect consumers from higher inflation, says FNB CEO Jacques Celliers.

"While this may seem punitive to borrowers, a higher interest rate serves the best interests of all consumers, especially those with limited income who are most vulnerable to higher prices," said Celliers.

Increasing income

He said the rate hike would bring some relief to pensioners who are dependent on income from their interest-bearing investments.

FNB expects the Monetary Policy Committee (MPC) to hike rates very gradually in 2019, in line with US Federal Reserve Bank tightening, according to chief economist Mamello Matikinca.

Changing fortunes for the rand

Investec economist Lara Hodes noted the MPC's view that heightened risk aversion, underpinned by policy uncertainty stemming from "escalating trade tensions, tightening global financial conditions and rising geo-political risks" would have a negative effect on capital flows into SA, causing further sustained depreciation in the rand.

The oil price also remains a significant risk to the inflation outcome.

She said outputs from the MPC's Quarterly Projection Model indicated four 25 basis point increases by the end of 2020.

Nedbank said the MPC had become more risk averse.

The MPC stressed that the rand's fortunes may change due to upside risks from tighter global financial conditions, financial market volatility and a change in investor sentiment towards emerging markets.

Keeping inflation in check

Luigi Marinus, portfolio manager at PPS Investments, said the reduction in SARB's GDP growth outlook for 2018 was of some concern, although the forecasts for 2019 and 2020 remained unchanged.

"Interest rates are the mechanism by which the SARB can attempt to keep inflation in check, and the MPC has shown that they are willing to act to adhere to the mandate, even when the decision is a difficult one," said Marinus.

Rate decisions not only based on growth

Maarten Ackerman, chief economist and advisory partner at Citadel, said it could be argued that SA's economy needs more stimulation, given the current difficult economic environment.

"However, SARB's interest rate decisions are not made solely on the basis of economic growth, but also on ensuring that inflation does not run away and breach the upper 6% target level," he said.

Boost the rand's purchasing power

Lukman Otunuga, research analyst at FXTM, said, although rates where hiked, the decision was complemented by a dovish touch as the narrative about domestic growth remained downbeat.

"Today’s move could bolster the rand's purchasing power while also encouraging foreign investment – a step that could be highly supportive to domestic economic growth," he said.

…But it sends a negative signal

However, according to Professor Raymond Parsons, of the NWU Business School, the decision by the MPC to raise interest rates sends a negative signal to the economy at this stage.

"It is difficult to reconcile the MPC reducing its growth forecast for 2018 yet again from its previous 0.7% to 0.6%, with its decision to now raise interest rates.

"Monetary policy should have continued to give the economic recovery, about which the IMF recently said confidence was being lost, the benefit of the doubt," said Parsons.

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sarb  |  interest rate  |  sa economy
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