U-turn as Marcus mulls a rate hike
Inflation worries governor THE Reserve Bank has begun to prepare the ground for higher interest rates, warning after its monetary policy meeting this week that it will not let inflation get out of hand — despite the sluggish economy and poor employment creation.
The tone of the announcement of its decision on Thursday to keep interest rates steady was surprisingly “hawkish”, which means that the statement from the monetary policy committee (MPC) dwelt more heavily on the risks of high inflation than the constraints on economic growth.
This does not mean that a rate hike is imminent, but it does imply that the next move in lending rates will be up, and could come sooner than many had expected, given that consumers are burdened with high debt and the rising cost of living.
“The door to hikes has now been opened,” said Nomura economist Peter Attard Montalto. He was sticking with his view that the first rise in rates would take place next May, but warned that it could even happen in January.
Most analysts think interest rates will start to rise only late next year as economic growth quickens from an expected 2% this year and demand-led price pressures start to kick in. Prime lending rates set by commercial banks have been steady at 8.5% since July last year.
“Should the risk to the medium-term inflation outlook deteriorate significantly, the MPC will not hesitate to take appropriate action in order to maintain the integrity of the inflation-targeting framework and to anchor inflation expectations at a lower level,” said the Bank’s governor, Gill Marcus.
“At this stage, however, given the global uncertainties and downside growth risks, the MPC has decided to keep the repurchase rate unchanged at 5%.”
The Bank has made it clear it is willing to tolerate a breach in the official inflation target range of 3% to 6% provided that it is temporary. But this has raised some eyebrows over its credibility.
Official figures on Wednesday showed that inflation measured by the consumer price index rose to 6.4% last month from 6.3% in July — its highest level in four years.
Inflation is expected to return to its target range in the fourth quarter of this year, but will average 5.8% next year and 5.4% in 2015, compared with previous forecasts of 5.5% and 5.2% respectively, the Bank said.
Marcus voiced the MPC’s “concern” that the latest inflation expectations survey from the Bureau for Economic Research (BER), released on Thursday, showed that on average, trade unions, business and financial analysts believe inflation will be slightly above its target range for the next two years.
This is somewhat surprising as the BER said it was “noteworthy” that expectations had not changed since the second quarter of the year, despite a big jump in inflation, a sharp depreciation in the rand and wage increases that were outpacing inflation.
The effects of the rand’s slide this year have fanned price pressures, but they appear to be less of a threat at the moment following the currency’s dramatic recovery from a low of R10.50 against the dollar last month to R9.88.
Like other emerging-market currencies, the rand’s latest rally has been spurred by news last week that the US central bank will carry on with its policy of “quantitative easing” — monthly bond purchases of $85-billion — which has pumped money into emerging economies like SA.
But Marcus pointed out that markets would continue to speculate on the timing of “tapering” of this stimulus, which meant that currencies like the rand would still experience a “protracted period” of volatility.
The local currency would also remain sensitive to the deficit on South Africa’s current account, the country’s broadest measure of trade, which widened to 6.5% of gross domestic product in the second quarter of this year, she said.
The deficit would narrow in the coming months due to the weaker rand, but the process would be slow, given the imports required by the capital spending programmes by stateowned enterprises.
Absa Capital expects the rand to weaken to R10.80 against the dollar in about a year because of the wide shortfall, which is mainly financed by foreign purchases of local shares and bonds — inflows which will falter once the Fed begins tapering.