Rate hike possible as rand stokes inflation

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IOL pic jan22 rsa bank notes Reuters File photo: Siphiwe Sibeko

Johannesburg - The Reserve Bank may increase interest rates before the end of the year as the rand weakens, according to a new survey of economists.

Seven of the 17 economists that provided interest rate estimates through the end of the year predict the bank will raise the repo rate from 5 percent, according to a survey conducted between last Friday and Wednesday. The forecasts range from 5.25 percent to 6 percent, with the rest predicting the rate will stay unchanged.

Investors are already pricing in a rate increase this year, with the one-year interest rate swap climbing 22 basis points this year to 5.77 percent as of 9.49am in Johannesburg yesterday. The rand’s 23 percent plunge against the dollar since the beginning of last year and record-high maize prices are adding to pressure on inflation and threatening the central bank’s 3 percent to 6 percent target.

Bets on higher rates were “a function of what the rand has done in the last couple of months”, Thando Vokwana, a bond trader at FirstRand, said. “The market has to be slightly negative and at some point start pricing in hikes.”

The rand has lost 3 percent against the dollar this year, the worst performer among 16 major currencies tracked by Bloomberg, and was bid 10c lower at R10.9634 to the dollar at 5pm yesterday.

Forward-rate agreements starting in 12 months, used to lock in borrowing costs, have risen 25 basis points, or 0.25 percentage points, to 6.56 percent this year.

Inflation will probably average 5.7 percent this year and 5.5 percent next year, according to the economists surveyed by Bloomberg. Statistics SA reported on Wednesday that consumer prices rose 5.4 percent last month from a year earlier.

Economists predict Africa’s largest economy will expand 2.8 percent this year, up from an estimated 1.9 percent last year. Growth will probably accelerate to 3.3 percent next year, according to the survey. South Africa’s fiscal and current account deficits will narrow over the next two years, the survey shows. The gap on the current account will probably ease to 5.6 percent of gross domestic product (GDP) this year and 5.4 percent next year.

The shortfall on the budget is forecast to reach 4.2 percent of GDP in the year to March 2015, above the government’s projection of 4.1 percent, and ease to 3.8 percent in 2016. - Bloomberg



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