Fund manager insights:
SO JUST HOW much of a surprise was the rate hike? Victor Mphaphuli, fund manager of the Stanlib Bond Fund, says it came as a big surprise. “We knew it was coming, but no-one thought it was going to come so soon. Economic growth is tepid, so expectations were that the South African Reserve Bank (Sarb) would be caught in a stagflationary bind (high inflation, low economic growth). So we just expected the Reserve Bank to sit it out.” The implication was that the bank would not act on interest rates, even if it meant seeing inflation rise above the bank’s target band for a short period.
“So for me it was about sending out a message. The Sarb, while being mindful of stimulating growth, regards inflation targeting as their top priority,” says Mphaphuli. He thinks that the Sarb was clearly worried about the currency and its impact on inflation. “The rand depreciated by 7% in January alone. Emerging markets’ currencies in general have been negatively affected by tapering.
So where to from here? And what are the implications for bond investors and yields? “The market is discounting another 1%-1.5% increase, potentially even reaching 2%,” says Mphaphuli. This should happen gradually as opposed to being sudden. “Most of the expected bad news on the rate front is already priced in. So I expect one more hike this year, particularly if the rand remains at weak levels.”