Johannesburg - Rate hikes are on the table, according to Reserve Bank governor Gill Marcus. Announcing no change in the repo rate, at the close of yesterday’s monetary policy committee (MPC) meeting, Marcus told a press conference that the MPC had spent a “considerable amount of time” debating an increase.
The repo rate has been unchanged at 5 percent since July last year, and prime and mortgage rates remain at 8.5 percent, the lowest level in about 40 years.
Marcus said the MPC had discussed “the circumstances that would warrant a rate hike and in what time frame. We didn’t agree on the time frame except that it was not at this meeting.”
Despite a further downward revision to its growth forecast, Marcus said the MPC had agreed that there was no room for a cut. The MPC estimated growth of 1.9 percent this year and forecast 3.3 percent next year, from the 2 percent and 3.3 percent respectively predicted at the MPC meeting in September.
Razia Khan, the head of Africa research at Standard Chartered, described the “admission that a rate hike was discussed” as “significant”. And she noted: “The perception in markets is that tightening has at least been put on the table. Bond yields are up, and the rand is firmer as a result.”
For the past few years, against a challenging global backdrop, Marcus has faced a policy dilemma. Slowing growth requires a rate cut, while an earlier breach of the 6 percent inflation target ceiling required a rate hike.
Marcus warned yesterday that the growth forecast faced downside risks, while the risks to the inflation forecast were to the upside, mainly due to the volatile exchange rate.
Inflation peaked at 6.4 percent in August, but fell to 6 percent in September and 5.5 percent last month, below expectations of 5.7 percent.
However, the bank’s inflation forecast for next year remains at the 5.8 percent forecast at the September meeting and above the 5.5 percent predicted in July.
Inflation has largely been driven by a depreciating rand, which has boosted the cost of petrol and other crucial imported goods. Marcus said the currency had fallen by 17 percent against the dollar since the start of the year, and by 15 percent on a trade-weighted basis.
The currency’s continued vulnerability is highlighted by figures from Citi on non-resident flows. In the 10 days to Wednesday, foreigners shed a net R18.5 billion worth of domestic bonds and JSE-listed shares; and in the month to Wednesday a net R24.7bn. The haemorrhage comes after a R3.1bn net outflow last month, largely due to a global exodus of emerging markets.
According to Annabel Bishop, the chief economist at the Investec Group, foreigners hold a third of the country’s rand-denominated bonds.
And she noted that expectations of “a withdrawal in the current monthly injection of liquidity in the US means reduced purchases of emerging market bonds”.
The US Federal Reserve is expected to start cutting its supply of cheap money in the US. As interest rates rise in the US, emerging markets become a relatively less attractive investment option.
South Africa, which runs a large current account deficit, relies on foreign investors to fund economic growth. The deficit – the gap between earnings from exports of goods and services and the import bill – was equal to 6.5 percent of gross domestic product in the second quarter.
Marcus said the underlying trend on the current account “is not expected to change significantly”, despite recent revisions to the trade data.
Yesterday at 5pm, the rand was bid at R10.1544 to the dollar, 5.8c weaker than at the same time on Wednesday. The local currency reached a low of R10.1056 during the session. - Business Report
