SA Reserve Bank's monetary policy committee expected to lift the repo rate this week
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THE RAND risks sliding this week if the South African Reserve Bank (SARB) does not begin normalising monetary policy rates following the US Fed's plans to start tapering its asset purchase programme.
The SARB's Monetary Policy Committee (MPC) is on Thursday expected to lift the repo rate by 25 basis points to 3.75 percent, due to elevated food and fuel costs. Headline inflation has risen to 5 percent on global factors and could rise further this month, with a risk of it rising again if high global fuel prices do not ease.
The high oil price, combined with the domestic currency's recent weakness, has seen a large rise in fuel prices this month, which will have a material effect on inflation.
The rand averaged R15.20 to the dollar yesterday, recovering from volatility that weakened it to R15.58 last month as emerging markets currencies came under pressure.
The local currency has already weakened to R15.49 to the dollar this month on concerns over the global move beginning in key areas towards normalising monetary policy.
Investec chief economist Annabel Bishop yesterday said South Africa risked further rand depreciation if the SARB did not begin hiking interest rates, in line with a number of other emerging market economies.
“A 25 basis points hike in the repo rate at Thursday's MPC meeting announcement is expected by the financial markets,” Bishop said.
“The rand is consequently likely to weaken quite significantly if the MPC leaves the repo rate unchanged on Thursday.”
In September, SARB governor Lesetja Kganyago indicated that the quarterly projection model implied a rate hike in November, and at each meeting in 2022 and 2023, as the economy was gradually recovering.
The economy has seen a quicker than expected rebound from the harsh lockdown restrictions of last year, due in large part to the revisions of the size of the economy. The government now expects the economy will grow by 5.1 percent this year, largely from buoyant exports and high commodity prices.
BNP Baripas chief economist Jeff Schultz also said the rate would and should increase, noting the economy was ready for a gradual increase in interest rates.
“We deem it prudent and appropriate for the SARB to begin a gradual process of monetary policy normalisation so as to ensure inflation expectations remain well anchored, which will ultimately allow it to not have to quickly raise rates back up towards pre-pandemic levels any time soon,” he said.
BUSINESS REPORT ONLINE