Consumers are waiting with bated breath for the South African Reserve Bank’s (SARB) Monetary Policy Committee’s (MPC) decision on the country’s interest rate which will be announced later this week.
SARB Governor Lesetja Kganyago will announce on Thursday whether the repurchase rate (repo rate) will be hiked, lowered or left unchanged.
The repo rate is at 8.25%, with the prime lending rate at 11.75% in the country.
At the MPC’s last meeting in July, the rate was neither lifted nor dropped, as the slight easing of inflation allowed the SARB to keep the rate unchanged, albeit sitting at a high level.
This week, however, global financial markets await the decisions of the Federal Reserve Open Market Commission (FOMC) on its decision on interest rates in the US. It will be announced on Wednesday.
The markets expect that the two central banks will keep rates unchanged, although some uncertainty and nervousness prevail.
Chris Harmse, a consulting economist of Sequoia Capital Management, said that if the FOMC raised its bank rate on Wednesday, the MPC would have no choice but to also increase the repo rate.
“The risk of a further depreciation of the rand may force the MPC to follow the FOMC closely,” Harmse said.
Frank Blackmore, the lead economist at KPMG SA, told “Business Report” that he expected the MPC to halt increases in September.
“In other words, it will remain at the same for the repo rate for the September meeting, and the reason being that the bank has told us that there will be data dependent in this regard, the latest data on inflation that came out was the July reading of 4.7% – both headline and core. We saw that inflation was driven by two main components, mainly being ongoing increases in housing and utilities, where the inflationary component was the increase in electricity prices that we saw in July,” Blackmore said.
“That inflationary component is still running at 14.7%, although housing and utilities are down to 5.1% in July in total. The other major component was food and non alcoholic beverages of which food was the main inflationary component. Sub-components are still climbing well above 10%, such as vegetables 18.5%, sweets, sugar and desserts at 18.7%; milk, cheese and eggs at 14.4%; bread and cereals at 13.1%, meaning food in total increased in July by 10% which is still way above the target level.”
Blackmore said we could expect food prices, as well as housing and utilities, to continue contributing to inflation but it would probably continue to moderate over the coming months.
“This will allow the Reserve Bank to take a breather on rate hikes, also depending on what the rest of the world does in this regard. We know there’s also been a wait-to-see-data dependency in many regions of the world and although some have increased, other areas are waiting to see whether inflation will continue to decline over the coming months,” he said.
“August CPI, which comes out on Wednesday, can potentially be slightly higher in the July reading but I don’t think that will cause any alarm. I think the trend of inflation we have seen is coming down from the highs of 7.8% registered in July last year to the current 4.7% which is close to the target rate this year.”
Investec economist, Annabel Bishop said it is also expected that SARB will keep interest rates on hold this week, although the risk of a 25bp hike remains, particularly after the Fed lifted its rates by 25bp at its last meeting.
“South Africa’s interest rates have remained unchanged since May after a 50bp hike in that month, while the US hiked by 25bp in both May and July, but the US has seen more monetary policy meetings in its interest rate hike cycle than SA, raising its Bank rate by 5.25% in total, versus SA’s 4.75%,” Bishop said on Tuesday.
“Consequently, an interest rate lift this week could cause little to no lasting appreciation in the rand, and instead, could well cause rand weakness. An interest rate hike would narrow the differential between US and SA interest rates, but heavily indebted consumers and the increased financial vulnerability of households mean higher interest rates are lowering economic growth. If no increase transpires, which is very widely seen as likely, markets will be heavily influenced by the Fed outcome and the tone of the FOMC meeting, as well as that of the SARB,” she further added.
BUSINESS REPORT