Rand outlook leaves door open for interest rate hike

THE Reserve Bank will continue to leave the door open for more interest rate hikes largely due to uncertainties over the rand and inflation, Reserve Bank deputy governor Daniel Mminele suggested on Tuesday.

There was “no guarantee” factors such as a firmer rand that had helped improve the inflation outlook and helped support unchanged interest rates in September would persist, he said at a Rand Merchant Bank/ Morgan Stanley Investor conference in Stellenbosch.

Mminele said “the bar to interest rate cuts is high”, further pouring cold water on speculation of an interest rate cut despite weak economic growth and a better inflation outlook.

The bank’s monetary policy committee said in September SA was close to the end of the interest-rate hiking cycle.

The committee had been careful to convey that some of the factors that had had a favourable effect on the inflation outlook could “reverse quickly, in which case the view that we are close to the end of the tightening cycle would need to be reassessed”, Mminele said.

The comments by the committee and Mminele were a clear indication that the door for one more interest-rate increase remained open, Nedbank economist Isaac Matshego said.

Matshego does not expect a rate increase at the committee’s last meeting for the year, in November, but says one is highly likely in January 2017.

Key risks would be SA’s credit ratings reviews, the US Federal Reserve meeting in December, and adverse domestic political developments, Matshego said.

“If the rand comes under pressure from these developments

If the rand comes under pressure we are likely to see a hike

and causes deterioration in the inflation outlook then we are likely to see a 25 basis-points rate hike in January and that would probably be the last one in this cycle.”

The bank left rates unchanged in September — the third consecutive time it left the repo rate on hold at 7%.

The rand remained at risk of sudden changes in global investor sentiment, while other factors posed an upside risk to inflation, including the possibility of faster wage settlements and the odds that a persisting drought could keep food prices higher than currently projected, Mminele said.

Inflation could surprise on the downside, for instance if the recent upward momentum in the rand’s exchange rate was sustained or if increased rainfall triggered a marked drop in grain prices, Mminele said.

Mminele said the committee would “more than ever” rely on forthcoming data and events in making their rates decisions.

In recent months several developments, both global and domestic, had allowed the bank to press the pause button in the rate-hiking cycle, Mminele said.

These included low interest rates in advanced economies, a moderate recovery in commodity prices, a quick subsiding of financial market volatility following Brexit, expectations for a US rate hike only later in the year instead of in September, and local inflation increasing at a slower-than-expected pace.