Interest rates likely to rise for two years

The South African Reserve Bank (Sarb) foresees higher interest rates in the next two years to help contain accelerating inflation.

The central bank’s quarterly projection model forecasts a benchmark rate of 7.7% by the end of 2020 compared with 6.5% currently, it said in its six-monthly Monetary Policy Review released on Monday in Pretoria.

While policy will remain accommodative to help support the economy, this suggests a higher repurchase rate “to keep up with accelerating inflation and the fact that funding for emerging markets is no longer as readily available as it used to be”, Sarb said.

A weaker currency and higher oil prices have compounded a dilemma for policy makers as they try to balance containing inflation that’s projected to accelerate toward the top end of its target range of 3% to 6%, and domestic demand that remains benign after the economy fell into a recession. Economic growth is seen slowing to 0.7% in 2018.

The central bank prefers inflation, which was 4.9% in September, to be close to 4.5%. The rate is projected to remain above that in the medium term, according to the Monetary Policy Review, fuelled by price-growth expectations.

The monetary policy committee, which cut rates in March, will announce its next policy move on November 22. Three of the seven panel members voted for a 25 basis points increase last month, when the rate was held at 6.5%.

“The repo rate is below what it should be,” Sarb governor Lesetja Kganyago said after the release of the report.

Rand undervalued

The rand has lost 15% against the dollar this year and is “significantly undervalued”, according to the report. Sarb has said it would not intervene to prop up the rand unless the orderly functioning of markets was threatened.

“Although we talked about raising interest rates, we are not contemplating emergency hikes of hundreds of basis points,” Kganyago said in the foreword to Monday’s report.

The rand’s effective exchange rate is forecast to strengthen to R14 per dollar by the middle of next year. – Bloomberg

The repo rate is below what it should be.

Lesetja Kganyago SA Reserve Bank governor