Marcus takes new approach to repo
IN an attempt to prepare companies, individuals and financial markets for higher debt costs, the Reserve Bank this week took the unprecedented step of warning that interest rates will rise.
It decided to keep the key repo rate steady at 5.5% this week — as expected — but for the first time provided clarity on the trajectory of interest rates, giving guidance like the US Federal Reserve and a few other central banks do.
The bank’s governor, Gill Marcus, also revealed that four of the sevenmember monetary policy committee (MPC) had voted to keep rates unchanged while three had argued for a rate hike.
“It was not a unanimous decision,” she said in reply to a question at a press conference after the announcement.
“But there is no difference of outlook. It’s a question of timing . . . we are indicating that interest rates are likely to rise in the future.”
Higher interest rates are needed to combat upward pressure on inflation generated mainly by the rand’s depreciation this year, which may worsen amid expectations of the US central bank starting to tighten monetary policy early next year.
Higher US interest rates will lead to a reversal of the capital inflows into emerging markets over the past couple of years, weakening their currencies.
The rand’s partial recovery since the previous committee meeting in January gave the bank breathing space to keep rate hikes on hold for now.
Analysts said that the bank had probably decided to spell out its intentions because its decision to raise the repo rate by half a percentage point in January had taken most by surprise, sparking a volley of complaints.
“There’s every evidence that interest rates in South Africa will ultimately need to rise, and the bank wants to ensure that households and corporates get the message for their financial planning,” said Barclays economist Jeff Gable.
“Given how fragile the economy is, and how strained consumers are, no one needs a negative surprise — they want to soften the blow.”
Analysts say they believe that the bank will raise the repo rate at its next policy meeting in May by 25 or 50 basis points.
Standard Chartered’s regional research head for Africa, Razia Khan, said the new forward guidance approach by the bank would be welcomed by financial markets, which were now pricing in interestrate increases of about two percentage points over the next 18 months.
This was likely to be excessive, given the weakness of the economy, which the MPC frequently highlighted in its statement following the interest rate announcement.
The bank now expects inflation to average 5.8% next year, down from an estimate of 6% in January, putting it just inside its official 3% to 6% target range.
It also cut its growth forecasts for South Africa, saying that the economy was likely to expand by 2.6% this year and 3.1% next year, compared with estimates of 2.8% and 3.3% in January.