South Africans must brace themselves for an interest rate hike as early as the fourth quarter of this year, although economists predict the first quarter of 2016, when inflation is expected to climb 6.7 percent.
Hovering over the domestic monetary policy is the expectation of the commencement of the US interest rate increase as early as June.
FNB chief executive Jacques Celliers said: “The decline in the value of the rand and a likely reversal of the downward trend in inflation rates may nudge the SA Reserve Bank (SARB) towards a rate hike later in the year. Unfortunately, consumers may come under increasing pressure during April and they should take great care when taking on new loans.”
The monetary policy committee (MPC) of the Reserve Bank kept the interest rates unchanged at 5.75 percent yesterday, given the uncertainty related to US policy normalisation and the weak state of the domestic economy.
Reserve Bank governor Lesetja Kganyago said the deterioration in inflation outlook had narrowed the room to pause in the process of domestic monetary policy.
Bart Stemmet, an analyst at NKC Research, said the Reserve Bank came out with a relatively hawkish statement, correcting some of its over-optimism, following the January MPC meeting.
He said although the South African economy could certainly use a boost, the nature of the current economic environment did not warrant an interest rate cut.
Stemmet said inflation had slowed on the back of an external oil price shock, the effects of which would be transitory, and soft economic growth projections stemmed from labour and electricity issues, both of which could not be addressed by lower interest rates.
“As such, unless there is a sustained, deep rooted slowdown in inflation expectations over the next 12 to 24 months – which we doubt will happen – the next interest rate move will still be higher. We expect this move to come during the fourth quarter of this year in the wake of an upward adjustment in US interest rates.”
The repo rate has remained the same since September, following a 25 basis points hike from 5.5 percent.
The rand fell against the dollar from R11.83 at the beginning of the MPC statement at 3pm to R11.96 at 4.15pm.
Jacques Du Preez, an RMB currency trader, said the weakening in the rand was largely due to US data issue yesterday afternoon rather than the SARB’s announcement.
Kganyago said the near-term inflation outlook had deteriorated with the partial reversal of the recent petrol price declines, emerging upside pressures on food and possible further electricity tariffs.
The rand exchange rate has depreciated further, adding to upside inflation risks, against the backdrop of the expected but uncertain tightening of US monetary policy, he added.
The domestic economy, however, remained weak amid electricity supply constraints and relatively subdued domestic demand, Kganyago said.
Inflation slowed to 3.9 percent in February from 4.4 percent in January. By contrast, core inflation, which excludes food, petrol and electricity, remained near the upper end of the Reserve Bank’s target range of 3 percent and 6 percent, having measured 5.8 percent in both January and February.
According to the Reserve Bank’s latest forecasts, inflation is now expected to average 4.8 percent this year, compared with the previous forecast of 3.8 percent.
A first quarter average of 4.2 percent is now projected as the low point, compared with 3.5 percent previously.
The strong base effects in the first quarter of 2016 are expected to result in a temporary one-quarter breach of the inflation target during that quarter, at 6.7 percent.
Inflation is expected to average 5.5 percent in the final quarter of the year, compared with the previous forecast of 5.3 percent.
The forecast for core inflation is more or less unchanged at 5.5 percent and 5.2 percent in 2015 and 2016 respectively.
The Reserve Bank’s outlook for the domestic economy remained overshadowed by the electricity supply constraints. This was likely to persist for some time, and had resulted in a downward revision of short-term potential output to between 2.0 percent and 2.5 percent, he added.
Nevertheless, some improvement on the 2014 growth rate of 1.5 percent was expected this year, in the absence of protracted strikes, Kganyago said.
Kganyago said employment has stagnated and likely to remain low. Growth in final consumption expenditure by households increased marginally to an annualised quarterly rate of 1.6 percent in th fourth quarter, and measured 1.4 percent over the year.
Kganyago said the recent higher trend in wage settlements had the potential to further upside pressure on inflation.
Nominal remuneration per worker over four quarters increased by 7.7 percent in the fourth quarter and, after accounting for changes in labour productivity, resulted in a unit labour cost increase of 6.2 percent, up from 5.7 percent in 2013.