Rate hike likely, to quell inflation
● Interest rates may go up this week when the Reserve Bank’s monetary policy committee (MPC) convenes for its last meeting of the year, delivering on its previous warnings that rates will need to begin rising to tame inflation.
It would be the first hike since March 2016.
Amid recessionary economic conditions the central bank has been at pains to keep rates on hold despite rising inflation.
But at the last MPC meeting, in September, three of the seven members voted for a hike, leading economists to believe that the risk of an increase is significant this week.
FNB chief economist Mamello Matikinca said the bank “expects to see a hike of 25 basis points [bps]”. At its last meeting, the MPC was split three to four, with the no-hike supporters edging out the hawks. But at this week’s meeting the committee will comprise only six members, with the Bank’s governor, a known hawk, casting the final decision in the event of a 3:3 split.
October inflation data, to be released on Wednesday, is expected to show an acceleration, though still within the Bank’s 3% to 6% target range. Bus fares, television licences and funeral expenses, along with a sharp rise in the fuel price, are among the factors in higher inflation, Matikinca said. A key concern was the pace of Federal Reserve monetary-policy tightening, with the next hike in the US expected next month.
“The SARB may well decide to get ahead of the Fed’s rate hike with one of their own. The arguments against a hike, however, are equally compelling given the recent currency gains, oil price declines and the exceptionally weak growth environment,” said Matikinca.
Investec chief economist Annabel Bishop said: “We continue to forecast a 25bps hike in the repo rate in November, but the chance of it occurring has likely reduced somewhat since a few weeks ago.”
Azar Jammine, chief economist at Econometrix, said: “I believe there’s probably a more than 50% chance that they will hike rates. People have been pointing to the fact that the vote in September was four to three and that the one person that people are confident voted against a rate hike — Brian Kahn — has retired and this time around there’ll be a three-all call and the Reserve Bank will opt to raise.”
Jammine said there was also an almost even chance the committee might hold rates after oil prices tumbled by a surprise 20%.
But Peter Worthington, an Absa economist, said: “If you take petrol [prices] out of CPI [the consumer price index], there’s no inflation. The risk is that we do get a vote in favour of the hike.”
He said the markets were “a little more comfortable” than previously that the Bank would not need to hike rates given the easing of inflationary pressures. But “I expect economists will remain quite divided”, he said.
Nedbank economist Isaac Matshego said: “The chances of a change, which is most likely to be a hike, are very low. Recently we’ve seen the rand has stabilised around R14.40 [to the dollar] and there’s a high chance of a significant petrol price decrease in December.”
Elize Kruger, an economist at NKC African Economics, said an improved CPI outlook would provide room for the Bank to maintain rates. She said that since the previous MPC meeting the rand exchange rate had remained stable on average and international oil prices had “dropped notably”.
But with petrol expected to drop by R1.54/l in December and diesel by 92c/l, CPI could ease to 4.8% year on year in December and push the headline CPI forecast lower for 2019.
“In light of these developments, we expect that the Bank will revise its CPI forecasts lower for both 2018 and 2019, while economic activity remains generally strained,” said Kruger.
At its September MPC meeting the Bank forecast headline CPI to average 4.8% in 2018, rising to 5.7% in 2019 and peaking at 5.9% in the second quarter of next year. Economic activity is, however, expected to improve. Recent retail, mining and manufacturing numbers indicate the economy pulled out of its technical recession in the third quarter of this year, but GDP data for this quarter will be released only in December.
Worthington forecast economic growth of 1.5% for the third quarter due to improved car and retail sales, and manufacturing production. The big uncertainty again will come from agricultural production, he said.
John Ashbourne, senior emerging-markets economist at Capital Economics, said most analysts expected hikes, but headline inflation possibly peaked in October and would trend downwards, meaning the rates could remain on hold.
‘If you take petrol prices out of CPI, there’s no inflation’