Rand weakness propels rates to five-year high
Reserve Bank hike forecasts muted festive season as SA consumers prepare to tighten belts
THE Reserve Bank has taken the controversial step of raising interest rates to a five-year high in the face of a sluggish economy and rising unemployment, but its decision is likely to delay the timing and magnitude of further rate hikes in the coming months, when inflation is expected to climb.
What prompted the move was concern over the impact on inflation of the rand’s depreciation, expected increases in electricity tariffs, and rising food prices triggered by the severe drought, Reserve Bank governor Lesetja Kganyago said when he made the announcement on Thursday.
But debate in the monetary policy committee had clearly been heated, with four members arguing for the 25 basis point increase in the repo rate — which took it to 6.25% — and two preferring to keep it steady. Commercial banks responded by raising their prime lending rates to 9.75% — an outcome that will hit consumers ahead of year-end holidays, when spending normally surges.
Market consensus had predicted that the committee would hold its fire after a slew of disappointing economic data, which showed that mining output plunged by 10% in the third quarter of the year while retail sales fell by 1.9% in September.
Yet many economists believed it had made the right decision ahead of an anticipated increase in US interest rates next month, which is likely to spark more capital outflows from emerging markets and further volatility in their currencies.
“It’s unfortunate that interest rates had to go up in this environment,” said Nedbank’s Isaac Matshego. “But it’s more prudent to move gradually now than wait until next year, when rate hikes might have to be more aggressive in response to higher inflation. The Reserve Bank would like to be ahead of the curve; it was the right time.”
Kganyago pointed out that South Africa had seen large net portfolio outflows since the end of August, with JSE data showing that foreign sales of equities amounted to R25.9-billion, while net bond sales amounted to R5.9-billion.
He also highlighted the risk of further depreciation in the rand, which hit a record low of R14.44 against the dollar on Monday, pressured both by the ongoing trend in emerging market currencies and reaction to the Paris terror attacks on November 13, which sparked “risk aversion” among global investors.
The rand firmed to R13.98 to the dollar in the morning after the rates decision.
“In acting early to perceived price risks 12 to 24 months down the line, the Reserve Bank has acted credibly, doing as much as it could to secure price stability,” said Razia Khan, Standard Chartered’s chief economist for Africa.
“We now expect that interest rates in South Africa can remain on hold for an extended period . . . we see the next rate hike of 25 basis points in September 2016.”
However, most analysts are predicting that the bank will gradually raise its repo rate to 7% or even 7.5% next year.
In response to a question at the press conference following the announcement, Kganyago confirmed that South Africa remains in a tightening cycle, which began last year and has now pushed interest rates up by 1.25 percentage points.
He also made it clear that the committee had seriously considered delaying the increase, which could give it room to assess unfolding developments at its next meeting in January, and avoid possible additional headwinds to South Africa’s weak growth outlook.
“On the other hand, delaying the adjustment further could lead to second-round effects and require an even stronger monetary policy response in the future, with more severe consequences for short-term growth,” he said.
What made the committee’s decision puzzling to many was that its inflation forecasts were little changed, with the headline rate of consumer prices forecast to average 6% in 2016, lower than 6.2% at its previous meeting in July, and keeping its forecast for 2017 unchanged at 5.8%.
It expects inflation to breach its 3% to 6% official target next year, but at 6.4% compared with 6.7% previously — largely due to lower assumptions for international oil prices.
The bank also slightly lowered its growth forecasts for the next two years, predicting 1.4% for 2015 and 1.5% for 2016, compared with 1.5% and 1.6% previously.
There are worries that this slow pace of growth could spark further downgrades for South Africa’s sovereign credit rating from global agencies, which have repeatedly cited the country’s tepid growth rate as negative for their assessments.
The Reserve Bank would like to be ahead of the curve; it was the right time The rand firmed to R13.98 to the dollar in the morning after the rates decision