Rand concerns, mixed data likely to keep a lid on interest rate hike

THE Reserve Bank’s monetary policy committee could keep interest rates steady at its meeting this week following mixed economic data and risks to the rand exchange rate, say economists.

Reasons to hold the repo rate, which remains unchanged since March this year, strengthened as the current account deficit narrowed during the second quarter. Retail sales, also released on Wednesday, softened during June and July as consumer spending was constrained.

Hugo Pienaar, senior economist at Stellenbosch University’s Bureau for Economic Research, said: “Our view is that the repo rate will remain unchanged.”

He said the improvement in the current account deficit during the second quarter — to 3.1% from 5.3% previously as a percentage of GDP — reduced the need to attract sizable foreign capital inflows as financing.

The improvement came as the economy recorded a R33-billion trade surplus during the second quarter from a deficit of R48-billion during the first three months of this year, according to the Reserve Bank’s Quarterly Bulletin published on Tuesday.

Investors seeking higher rates of return tend to favour markets with higher interest rates. The Reserve Bank has hiked rates by 200 basis points between January 2014 and March this year. Currently the repo rate is 7%.

Soft retail sales data for June and July and the recent betterthan-expected headline consumer price inflation figures supported the policy rate remaining on hold, said Pienaar.

In July CPI declined 0.3% to 6% from the previous month, just within the Reserve Bank inflation target range of 3-6%.

On Wednesday Stats SA reported a slowdown in retail sales growth to 0.8% year on year in July. This was weaker than the market expectation of 1.9% year on year and June’s revised 1.4% year on year.

It also pales in comparison to South Africa’s historic real retail sales growth, which Annabel Bishop, Investec’s chief economist, said was between 5% and 14% in boom periods.

Bishop said real disposable income was weak. The cost of servicing household debt jumped to 9.8% during the second quarter and is the highest ratio since the first quarter of 2010 as a result of higher interest rates. The petrol hike of R1.60 a litre between April and July also eroded consumer spending power, she said.

But even if the Reserve Bank keeps rates on hold this week, further hikes may still materialise. Nedbank expects a 25 basis point rate hike early next year.

Busisiwe Radebe, an economist at Nedbank, said the monetary policy committee’s “main focus will be on the rand and its impact on inflation”. A potential hike in US interest rates this week — the first in nine months — could tempt investors to dump emerging market assets for the US, adding to volatility in the rand.

Radebe said the surprise lift in South Africa’s GDP growth to 3.3% in the second quarter — from a contraction of 1.2% in the first quarter — temporarily alleviated some growth concerns, another factor the Reserve Bank has to consider.

Radebe expected weaker growth in the second half of this year and a weaker rand if the sovereign credit rating is downgraded to sub-investment in December. This would lead to an increase in inflation.

Pienaar said that, given risks to the rand exchange rate, “we do not think that the Reserve Bank will be in any hurry to reduce the repo rate”.

The main focus will be on the rand and its impact on inflation