Economists see end to rate-hike cycle

Published Jul 21, 2016

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Johannesburg - Economists warned yesterday that South Africa’s rate-hiking cycle could be coming to an end amid the threat of the first recession in seven years, while others said the Reserve Bank’s monetary policy committee (MPC) would keep the rate at 7 percent today, and a further two hikes might come later this year.

South African inflation quickened for the first time in four months. Headline inflation pulled further away from the Reserve Bank’s 3% to 6% target last month, but analysts said the increase was probably not enough to justify an interest rate hike today.

While pursuing its mandate of containing inflation, the Reserve Bank is wary of adding further strain on the economy.

Inflation quickened to 6.3% year on year in June from 6.1% in May. The acceleration was in line with expectations of most economists.

Price growth has exceeded the Reserve Bank’s target since the start of the year.

Since last July, the Reserve Bank has increased its benchmark repurchase rate by 125 basis points to 7 percent.

Analysts, who expect the Reserve Bank to keep its repo rate on hold at 7 percent, said the latest inflation print would not change that view. “I don’t think it’s going to have any impact at all. We thought by now inflation would probably be near 7 percent,” said Eskom’s chief economist, Mandla Maleka. “We can live with 6.3,” he said, predicting a hike in November.

Nedbank said: “The delay in US interest rate hikes, the recent strengthening of the rand and the poor domestic economic environment reduces the chances of further monetary policy tightening today. However, we still are pencilling in one more hike of 25 basis points before year end, although much will depend on the rand as the year progresses.”

The rand edged up against the dollar yesterday, suggesting some traders believed there was a slightly higher chance of a rate hike this week.

Statistics SA said prices were up 0.6 percent on a month-on-month basis last month, after a 0.2 percent increase in the previous month.

Core inflation rose slightly to 5.6 percent year on year in June from 5.5 percent, and to 0.4 percent month on month from 0.2 percent.

Lesiba Mothatha, the chief economist at Investment Solutions, said: “I think it’s the end of the hiking cycle. I think the conversation in the committee should be that of pausing and a concerted effort be given in the discussion around easing.”

Rian le Roux, the chief economist at Old Mutual Investment Group, said amid a backdrop of concerning local and global factors, the Reserve Bank was unlikely to raise interest rates again this cycle.

He said his view was based on the fact that inflation had mostly surprised the market on the downside in recent months. “The peak in inflation towards the end of the year is now likely to be lower than previously thought and forecasts still point to inflation drifting back into target in 2017.”

Annabel Bishop, the chief economist at Investec, said the MPC had yet to signal its rate hike cycle was over.

“The MPC’s tone at its meeting tomorrow (today) will provide guidance on whether an inflection point has been reached in the interest rates in South Africa, or whether further interest rate hikes are likely still to come.”

* With additional reporting by Bloomberg and Reuters

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