Don’t expect change on interest rates, say economists

The South African Reserve Bank (SARB) will leave interest rates unchanged for the foreseeable future should current economic conditions persist, economists predicted on Wednesday.

Economists Chris Hart of Investment Solutions, Dawie Roodt of the Efficient Group and Azar Jammine of Econometrix made the comments ahead of Reserve Bank governor Gill Marcus’s Thursday announcement of a monetary policy committee decision on repo rates.

Addressing a South African Institute of Race Relations’ (SAIRR) seminar on the medium-term future of the South African economy, Roodt said: “[SARB] has begun making a noise about interest rates but don’t expect them to make any decisions before 2013. I predict a 0.5% increase in the first quarter of next year at the earliest.”

The repo rate determines the interest percentage at which SARB lends money to commercial banks in the country.

If rates remain unchanged, it will be the eighth consecutive decision keeping them flat — the last change being a 0.5% drop in November 2010.

The current level of 5.5% is the lowest that interest rates have been in over 30 years.

‘Massive risk’
Roodt’s sentiment was echoed by Hart, who added that any movement on interest rates hinged on the rand’s exchange rate.

“Globally there is a move to leave interest rates as they are, alleviating pressures on our economy to make any moves. But this will change if there are fluctuations in the currency market like the rand weakening against the US dollar,” Hart said.

As of Wednesday the rand was valued at R7.65 to the US dollar, indicating a slow showing against the greenback from the end of February when it was valued at R7.44.

But predictions are that as soon as SARB begins to hike interest rates, a lengthy cycle of upward adjustments are in the offering.

“SARB is slowly realising the massive risk worldwide in sustaining interest rates at historically low levels. South Africa may not be in as bad a situation as the US or Europe but SARB is appreciating that, by artificially keeping interest rates low, there is a massive distortion in the true value of credit,” Jammine said.

Stimulating the economy
Roodt added that while SARB’s attempts to stimulate the economy by keeping interest rates low were working in the current economic climate, an increase was definitely on the horizon.

“Rates cannot remain as low as they are now for very much longer. If you are thinking about borrowing money, do it now while you can,” Roodt said.

The trio were also doubtful about South Africa’s growth prospects for the immediate future.

While both Hart and Jammine predicted a growth rate of “no more than 3%” for 2012 through 2013. Roodt was more optimistic, predicting growth of “up to 4%” for the same period.

After SARB’s last monetary policy committee meeting, South Africa’s growth forecast for 2012 was marked down to 2.8% from 3.2% and dropped to 3.8% from 4.2% in 2013.

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