A nudge before a season of hikes

Bank ‘to raise rates over next 18 months‘

THE Reserve Bank has taken the bold step of nudging interest rates higher despite stagnating economic growth, affirming its inflation-fighting credentials as price pressures intensify.

But it raised the repo rate by just 25 basis points to 5.75% — the smallest change in more than a decade — in a signal that interest rates will rise at a very gradual pace to minimise adverse economic effects.

In a statement on Thursday, the Bank’s monetary policy committee repeatedly highlighted the risk of a wage-price spiral sparked by high pay settlements and demands well in excess of the current inflation rate of 6.6%.

But it also slashed its forecasts for economic growth, noting that the latest estimates did not take account of the strike by workers in the manufacturing sector, which it assumed would be resolved “speedily”.

This looks probable now as the National Union of Metalworkers of SA has moved closer to a three-year wage offer from the Steel and Engineering Industries Federation of SA, saying it will agree on a twoyear pay deal of 10% a year.

This followed a five-month platinum-mining strike, which the bank said reduced the value of exports by R20-billion in April and May, compared with the first quarter of the year.

A protracted strike by the metal workers would “potentially have much wider ramifications” because of the direct linkages to other sectors of the economy, the committee warned. But it said: “The weak growth outlook, however, is not something that monetary policy can ameliorate.”

The bank now predicts that the economy will expand 1.7% this year and 2.9% next year, down from estimates of 2.1% and 3.1% respectively at the committee’s May meeting.

The committee said that monetary policy should not be seen as the growth engine of the economy as the reasons for its poor performance were structural. Interest rates were still IN A HARD PLACE: Reserve Bank governor Gill Marcus

It is going to make things more difficult, but inflation is also harmful. That is why the small increment is welcome

low enough to support the domestic economy, and any future moves would be “gradual and highly data dependent”.

Since raising the repo rate in January, the committee has repeatedly pointed out that it is in a cycle of rising interest rates, given the prospects of monetary tightening in the US, which would slow capital flows to emerging markets

But it toned down its rhetoric this week, saying that it had decided to continue on its “normalisation” path — central bank speak for moving interest rates above the inflation rate.

The difference of opinion in the committee showed how difficult the decision to raise the repo rate was. Six of its seven members wanted an increase, with one arguing for a 50 basis point hike. The seventh member wanted to keep interest rates steady.

“There is a very strong common understanding of what the issues are — there’s no difference in the [committee] about the challenges we face, the challenges of rising inflation and slowing growth,” said the bank’s governor, Gill Marcus.

Some analysts believe that this week’s repo-rate increase was not enough to address rising inflation and rand weakness, which aggravates price pressures. The rand weakened after the decision, breaking through the R10.75/dollar level, which indicated the increase may have been too low.

Nomura economist Peter Attard Montalto said: “We view this move as a missed opportunity to have stability in rates at the next few meetings.” But it was right that it hiked because of its mandate and concerns on inflation, he said.

Committee member Rashad Cassim told reporters that the modest increase should be seen in the context of the previous rate hike and “what we’re likely to do over the next two or three years. All of that has to be looked at as having an impact on the inflation trajectory.”

Most analysts believe the bank is likely to continue raising interest rates in increments of 25 basis points over the next 18 months, bringing the repo rate to at least 7%.

“Our view that the bank hikes a further 100 bp in 2015 in aggregate remains intact,” Barclays said in a research note.

Neren Rau, chief executive of the South African Chamber of Commerce and Industry, said: “It’s not ideal, but the Reserve Bank was caught between a rock and a hard place, and had to take action. It certainly is going to make things more difficult, but inflation is also harmful. That is why the small increment is welcome.” Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.timeslive.co.za