Gear Up for a 0.5% Interest Rate Hike

Jan 26, 2016

Keeping up with the Curve

Economists agree that the South African Reserve Bank’s (Sarb’s) monetary policy committee (MPC) is likely to announce a 0.5% interest rate hike on Thursday, 28 January 2015 . This interest rate hike of 50 basis points (bps) is far higher than initially predicted.

This prediction is based on the prolonged rupture of the 6% Consumer Price Index (CPI) target ceiling, as well as increased inflation risks to the rand and food prices. Irrespective of Sarb’s decision, experts contend that over the course of 2016, we will see an overall interest rate hike of 1% (100bps).

Hiking interest rates by 0.5% in January makes the most sense, as this will give Sarb more options in March. At which time, the MPC could either keep the interest rate the same, raise it by 0.25% or hike it by 0.5%. A decision to raise the repo rate by 0.5% now will keep it ahead of the curve inflation-wise.


Reversing Negative Sentiment

Naturally, a 0.25% interest rate hike would be far more preferable, as this would be less of a jolt to the household budget. Incremental, modest hikes allow for a process of normalisation and adjustment to considerably more expensive credit rates.

Regrettably, this is not to be, according to the projections of top economists.

The key reason being, a 0.5% interest rate hike would restore confidence in the Sarb and the rand, levelling the interest rate curve. Given, the rand is not prone to being sensitive to interest rate changes. Sarb is likely to take this giant step regardless, in order to reverse the negative sentiment of the past two months.


Hang on a Moment… 

Conversely, other economists have argued that the governor’s comments in Davos point towards a 0.25% interest rate hike. Their belief is that Sarb will remain methodical and calculated in their approach to interest rate hikes.

Prior to the MPC meeting, Sarb has been very careful in its commentary. It wishes to seem composed and resolute in its intention to hike interest rates, in the face of a shifted outlook. Then again, the MPC would by no means wish its decision to seem as though out of panic.

Sarb is aware that it’s facing a new rand dimension after December’s Nenegate, which suggests that higher interest rates are essential, as our country’s credit risk escalates.


Managing Expectations

Sarb could justify a 50bp hike as an adjustment to a changed economic environment, even though this move would not support the rand.

Sarb is keen to show markets that it’s not looking to prop up the rand. It is more eager to curb expectations of a 0.75% or 1% interest rate hike. Despite some MPC members backing these figures. Rising food prices and the weakened rand pose serious threats to the inflation forecast. Average inflation is envisaged to rise to 6.5% in 2016, then to a further 6.7% in 2017.

Some experts believe Sarb is underestimating the protracted, lagging impact of a weaker rand and higher food prices. These experts are of the opinion that a 25bp hike would be a mistake, as it would signal that Sarb is prioritising growth over inflation. They feel a 75bp or 100bp interest rate hike would show that Sarb is taking building inflationary pressures seriously – as it should be.

The expectation is that rates will continue to be hiked, hitting 8% at the end of 2016 and 8.5% by the end of quarter one in 2017.


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