Mention of repo rate tightening drives price action in SA, say analysts

Reserve Bank governor Gill Marcus's acknowledgment on Thursday afternoon that the monetary policy committee (MPC) had discussed a rate hike extensively caused the rand to strengthen and bond yields to go up, say analysts.

Responding to questions after announcing that the repo rate – the rate at which the reserve bank lends to commercial banks – would remain at 5%, Marcus said that the possibilities of a rate cut and a rate increase had been discussed, with the latter possibility dominating conversation.

"Discussion about increasing rates consumed a considerable amount of time," she said, with committee members weighing up whether current economic circumstances warranted a rate hike and over what time frame that should occur. "We didn't have agreement on the time frame, except that it wasn't at this meeting," said Marcus.

"We all agreed that we did not think it was appropriate to raise rates at this meeting, but it was certainly a topic for discussion."

The rand strengthened against the dollar after Marcus's remarks, reaching its highest point in the day – R10.10 to the dollar – just after 4pm.

'Significant feature'
Razia Khan, African regional head of research at Standard Chartered bank, said this comment was the "more significant feature" of the MPC's statement.

"The perception in markets is that tightening has at least been put on the table," said Khan on Thursday afternoon. "Bond yields are up, and the rand is firmer as a result."

The yield on 13-year bonds rose by 11 basis points, or 0.11 percentage points, to 8.24% at 5.14pm in Johannesburg, according to Bloomberg.

Investec chief economist Annabel Bishop said the MPC's stance was to be expected. "The MPC's tone was not more hawkish than at the September 2013 MPC meeting, but was not markedly more dovish either," she said. "The Reserve Bank remains focused on inflation targeting rather than growth and development."

South Africa's repo rate has remained unchanged since July 2012, when it was docked by half a percentage point. In contrast, several influential emerging economies have increased their repo rates in the past two months, and many advanced economies have taken the decision to cut. 

At the centre of it all is talk around the winding up of stimulatory practices by the US federal reserve. "There is a great deal of uncertainty around the timing and pace of tapering," said Marcus.

Higher inflation dynamics
Owing to this uncertainty, emerging market economies are facing generally higher inflation dynamics, she said. "Inflation pressures have prompted monetary policy responses in a number of countries, including Brazil, India and Indonesia, who have all raised rates."

Although South Africa's October rates, released the day before the MPC's announcement, came in lower than expected at 5.5% compared with 6% in September, Marcus said the country’s inflation forecast "remains uncomfortably close" to its upper limit.

Fears of further, tapering-induced exchange rate pressures and uncertainty around the extent to which tapering is already priced into the market meant the MPC ignored rate decisions in other countries and held fast.

And according to Khan, a rate hike would be difficult to justify. "As much as inflation remains uncomfortably close to the upper end of the inflation target, it is difficult to justify a rate hike when there is little evidence of demand-related pressure in sight," he said. 

"Looking at South Africa's history, neither is there any comfort that raising rates will be sufficient to prevent rand weakness should it come to it. That would be the wrong policy option, at the wrong time."

Thalia Holmes
Thalia Holmes

Thalia is a freelance business reporter for the Mail & Guardian. She grew up in Swaziland and lived in the US before returning to South Africa.

She got a cum laude degree in marketing and followed it with another in English literature and psychology before further confusing things by becoming a black economic empowerment (B-BBEE) consultant.

After spending five years hearing the surprised exclamation, "But you're white!", she decided to pursue her latent passion for journalism, and joined the M&G in 2012. 

The next year, she won the Brandhouse Journalist of the Year Award, the Brandhouse Best Online Award and was chosen as one of five finalists from Africa for the German Media Development Award. In 2014, she and a colleague won the Standard Bank Sivukile Multimedia Award. 

She now writes and edits for various publications, but her heart still belongs to the M&G.     


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