In July 2012, the Reserve Bank cut its repo rate to 5 percent. And every six weeks since then, when the bank’s monetary policy committee (MPC) meets, economists and borrowers have debated its next move.
Last seen in the early 1970s, the historically low repo rate has held benchmark prime and mortgage rates at 8.5 percent – a much-needed concession to householders and other hard-pressed borrowers.
Despite a falling rand, governor Gill Marcus has been reluctant to hike the repo rate because economic growth is low – probably less than 2 percent last year – and credit growth is slow. But the rand breached R11 to the dollar last week, a worst point not seen since shortly after the collapse of US investment bank Lehman Brothers in 2008.
A further sign that investors need encouragement to invest locally comes from data on non-resident investment in local bonds. On Friday Citi reported the biggest bond outflows since May last year. At that point, the US Federal Reserve signalled the end to its easy money policy – a process that kicked in this year. As the US Fed tapers its monetary boosting programme, people will no longer be able to borrow dirt cheap in the US and invest in high-yield currencies as they did in the past.
The results can be seen in local markets. Citi recorded non-residents sold nearly R4.4 billion in local bonds on Thursday, bringing net bond sales in the month to nearly R8.9bn. The outflows are not specific to South Africa; most emerging markets are under pressure. But bond dealers note that South Africa and Turkey are worst hit and are being described as the delicate duo. Argentina is also on the critical list and several other currencies are vulnerable and volatile.
Against this backdrop, when the MPC meets this week, a rate hike could possibly be on the cards to provide a safety net for the rand.
Though a weak currency is often seen as a way to boost manufactured exports, the benefits can be outweighed by rising prices. Petrol at the pump, for instance, already at record highs, will move still higher next month – probably by more than 30c a litre. There is not only the indirect effect to be absorbed by consumers but a knock-on effect through transport costs on the whole economy.
Traditional thinking has it that, by hiking rates, Marcus could make investment in the local currency more attractive and stop or reverse the currency slide.
Would higher rates prove a tonic for the rand? Many argue that it could be counterproductive.
Investec strategist Brian Kantor notes that rate hikes have already failed elsewhere. “One sincerely hopes that the authorities have taken full notice of the unhappy experience of those emerging market central banks that, unwisely and unlike the SA Reserve Bank, have reacted in a highly activist way to the pressures in the currency and bond markets emanating from global investors and capital flows out of emerging economies and back to developed ones.”
In other words, higher rates may do nothing more than reduce growth further.
While higher rates may attract investment to bonds and bank deposits, they are a turn off to those who invest in shares – because they reduce growth. So it may be that we gain on the bond swings and lose on the equity roundabouts. Citi figures show that non-residents bought a net R3.4bn worth of JSE-listed shares.
While the MPC may surprise us, most economists see no rate hike this week or in the months to come. November has been earmarked as a likely date.