More interest rate hikes in the pipeline – Mminele

SOUTH Africa’s cycle of interest-rate increases has not yet run its course, according to Reserve Bank deputy governor Daniel Mminele.

“The risks in the policy environment remain too numerous to be able to say definitively that the hiking cycle is over,” Mminele said on the Reserve Bank’s website. That’s even as “the recent improvements to the inflation outlook are a positive development”.

While price growth slowed to 6 percent in July, the lowest rate this year, the rand slumped and inflation expectations, as measured by the five-year break-even rate, surged to credit rating, which raises the country’s cost of borrowings, would then make it likely that further credit rating downgrades could ensue.”

Deterioration

the highest in more than five weeks last Thursday, following reports that the Hawks had summoned Finance Minister Pravin Gordhan to its office. The monetary policy committee left its benchmark repurchase rate unchanged at 7 percent at its last two meetings and said in July that it pressed the “pause” button on the increase cycle.

The committee has raised borrowing costs by 125 basis points since last July as it sought to steer inflation back into its 3 to 6 percent target range. Much of the current increase cycle has been about preventing second-round price effects, Mminele said. The cen-

In a Reuters poll of 23 economist surveyed last week, the majority expected South Africa’s credit rating to be cut to junk status this year.

Bank of America Merrill Lynch predicted R16 to the dollar by the end of the year.

Merrill Lynch said the expectation of a ratings downgrade from S&P Global Ratings would also contribute to the currency’s depreciation.

In a research note, Merrill Lynch said it expected the SA Reserve Bank to raise the repo rate to 7.5 percent next January, instead of November. A weaker rand poses risk to the inflation outlook as imported tral bank forecasts inflation will only return to the target band by the middle of next year.

“The currency remains an important risk factor as recent trends can quickly reverse should global risk perceptions change,” Mminele said.

Forward-rate agreements used by investors to bet on borrowing costs are now pricing in 55 basis points of rate increases over the next 18 months, compared with five basis points on August 23, before the first reports about the probe into Gordhan were published. South Africa has “too much inflation” to lower rates, governor Lesetja Kganyago said. – Bloomberg goods become more expensive.

Macquarie senior economist Elna Moolman said the impact of the rand’s partial reversal of its gains on one’s inflation forecasts would depend on the assumptions originally underpinning such forecasts.

Moolman said, even prior to the recent weakness, Macquarie felt that the latest bout of the currency’s appreciation was not entirely sustainable.

“Our inflation forecasts are thus based on an assumption that the rand would weaken back to levels of around R14.50 (to the dollar) by year-end and through 2017. We have not changed our inflation forecasts in response to (the) rand partly reversing its recent gains. We expect consumer price index inflation to average 6.4 percent (this year) and 5.8 percent (next year). We do not expect the (central bank) to change interest rates,” she said.

Meanwhile, it is now being reported by other publications that Gordhan allegedly told Treasury staff that he was being targeted by the Guptas.

Under investigation

The Gupta’s businesses are under investigation, with investigations by the Treasury into alleged corruption relating to their business dealings with state-owned companies.

The Gupta family said on Saturday that it planned to dispose of all stakes it held in South African businesses.

The Gupta family said “we now believe the time is right for us to exit our shareholding of the South African businesses” and it believed the move would benefit its current employees.

“As such, we announce today our intention to sell all of our shareholding in South Africa by the end of the year. We are… in discussions with several international prospective buyers,” the Guptas said.

Eskom said yesterday that it “continues to co-operate with the Treasury on its coal contract probes”, including Tegata Expolaration and Resources. – With additional reporting by Reuters