International pressures point to rising interest rates in SA
● The luxury of lower interest rates may be drawing to a close soon for South African consumers after one of the Reserve Bank’s deputy governors, Francois Groepe, hinted at interest rate hikes on Friday.
External pressures are heightening for the Bank and other emerging-market central bankers.
Interest rates are rising in advanced economies, global financing conditions are tightening and international trade tensions have caused further volatility in global financial markets.
Historically, hikes in the US interest rate cycle have raised growth and financial stability risks for emerging markets as capital outflows intensified.
Emerging markets were experiencing currency weakness and higher inflation, and SA was no exception, Groepe told delegates at the UBS conference in Cape Town.
SA faced two key external risks over coming months. He said the first was a possible sharp and sustained drop in capital inflows, as US interest rates increase. The second was a further substantial rise in the oil price.
“The two could also conceivably occur simultaneously. If so, SA would face increased inflationary pressure and a further drag on household disposable income.”
He said inflation had been relatively constrained so far this year. Demand has been muted with the economy in recession and household consumption expenditure contracting by 1.3% in the second quarter.
But inflation was forecast to rise. The central bank forecasts an average of 4.8% for 2018 before peaking at 5.9% next year and moderating to 5.4% in 2020.
Administered price growth was a drag on inflation, Groepe said.
Monetary policy operates with a lag and the monetary policy committee must consider inflation expectations for 12-24 months ahead.
The Reserve Bank’s quarterly projection model predicts five interest rate hikes of 25 basis points each by the end of 2020. This was based on the outlook for the exchange rate, the output gap and inflation.
“All things being equal, if monetary policy tightens by less than the model predicts, inflation may come out higher than is currently expected,” Groepe said.
Interests rates were last hiked by 25 basis points in March 2016, following a sustained hiking cycle that began in 2014 and resulted in cumulative 200-basis-point hikes.
Rates were dropped twice — by 25 basis points each time — since July last year.
Absa senior economist Peter Worthington said Absa expects the Reserve Bank to hold rates until the third quarter of next year. However, “a sharp lurch weaker in the rand could precipitate an earlier hike”.
The Bank was also likely to keep rates steady if the market reaction to the mediumterm budget policy statement and the government’s investment summit next week was favourable.
“Aside from administered prices, especially fuel, there are no inflationary pressures. Additionally, the September CPI release, due to be published next week, could show another sharp downward adjustment due to falling rental prices,” Worthington said.
In a report on Friday, ratings agency S&P Global Ratings said SA remained vulnerable to changes in investor sentiment due to its current account deficit that was financed by “volatile portfolio and other investment flows”.
S&P expected the current account deficit to average 3% of GDP between 2018 and 2021, from more than 5% in the prior four years. It said potential fallout from the land reform debate and “a possible waning reform momentum in the run-up to next year’s election” could weaken foreign investor sentiment and thus capital inflows. Additional reporting Penelope Mashego