South African Reserve Bank file photo
JOHANNESBURG – The Monetary Policy Committee (MPC) will meet on Wednesday and Thursday this week to consider the current stance of monetary policy. 

The MPC will decide whether or not an interest rate hike will be imposed on South Africans who are only recently recovering from the news that the country's economy is in a recession. 

According to Investec's Annabel Bishop, September’s meeting will be a close call, with the pressure on to hike by 25bp as interest rates rise globally, and South Africa’s inflation climbs.

Bishop said: "The trade weighted rand is around 10 percent weaker on a year ago, and if sustained, this weakness would imply about a 0.2 percent year-on-year lift in future inflation. The last MPC meeting forecast CPI inflation at 5.6 percent year-on-year for 2019 and 5.4 percent year-on-year for 2020, and the Sarb will likely lift these forecasts this month.  The elasticity, or perceived pass through effect, of around 0.2 percent would imply the 10 percent depreciation in the nominal effective rand year-on-year, if sustained, would be expected to raise CPI inflation to 5.8 percent year-on-year  in 2019, and 5.6 percent year-on-year  in 2020." 

"The MPC tends to hike when its inflation forecasts rise close to the upper limit of its 3 percent to 6 percent year-on-year  CPI inflation target range, over its target period of six to 24 months.  Indeed, at its last meeting the MPC said it would not hesitate to hike should evidence emerge of second round effects which could take its CPI inflation forecast significantly away from the midpoint of the inflation target range ."  

Bishop further added, "We forecast a 25bp hike in interest rates at the September MPC meeting (outlined in the attached document), as inflation expectations are likely to have risen materially (the BER inflation expectations survey will be published at the time of the MPC meeting), while the rand’s substantial weakness is likely to amplify second round effects. Breakeven rates have also risen, showing expected higher inflation.  This represents a change in our view as originally we expected the first hike in the cycle would occur early in 2019 (see “Q3.18 Macro outlook”, 2nd July 2018), but last week we moved this forecast up to Q4.18 (see “Interest rate note”, 11th September 2018) and now we have moved the forecast forward again, to a 25bp hike at the MPC meeting this week."