The governor of the Reserve Bank
Inflation in South Africa may be under control, but there are a number of other factors – ranging from the ending of quantitative easing in the United States, to the need to attract foreign capital – that will determine whether the country’s repo rate is hiked or not this week.
The Reserve Bank’s monetary policy committee is set to announce its decision on Thursday.
The bank’s governor, Lesetja Kganyago, who took over from Gill Marcus on November 9, will be the biggest unknown factor in the committee’s decision.
Kevin Lings, the chief economist at Stanlib, said Kganyago’s speeches of late have emphasised the need to normalise interest rates.
The new governor has long been seen as a policy hawk, whereas Marcus was often described as a dove. Hawks generally favour higher interest rates to keep inflation in check, while doves prefer lower rates.
The bank is widely expected to leave the repo rate unchanged at 5.75%.
Lings said that although economic growth had improved somewhat, its “only a bit better in relation to the poor data in the first half of the year”, owing to strike activity on platinum mines and in the metals and engineering sector.
“Overall I would say the economy is fairly stagnant, and so rate hikes in that context are not particularly helpful … You don’t want to stifle the investment you have.”
On top of that, there was clear evidence inflationary pressures had eased, and the oil price played a big part in that, said Lings.
Rate hike not justified
The price of Brent crude dropped from over $110 a barrel in July this year, to under $78 on Monday, largely as a result of oversupply in the market.
Consumer price index inflation figures will be released on Wednesday, and are likely to remain within the target band because of the low oil price.
“On the face of it, in terms of pure economics, you would be well justified just leaving rates on hold,” said Lings, who believes the bank will do just that when it announces its decision on Thursday afternoon.
The bank’s primary mandate is to target inflation, which it aims to keep within a band of 3% to 6%.
Jean-Pierre du Plessis, a strategist at Prescient Investment Management, said: “A rate hike is not justified by domestic inflation, which has come down to below the 6% upper limit of the [bank’s] target, and is likely to remain within the target band given recent oil price weakness.”
Lings said a factor that will play a role in the monetary policy committee’s decision is the fact that central banks around the world recognise the need to normalise interest rates, which have been at historically low levels across the globe.
In an ideal environment, interest rates should be higher than the rate of inflation. The effect of not normalising rates, Lings said, was the creation of distortions in the economy that discouraged savings and encouraged risk-taking in investments.
Need to attract foreign capital
The Reserve Bank began a rate hiking cycle in July last year, and steadily increased the repurchase rate [the rate at which banks borrow money from the bank] to 5.75%.
“Marcus has clearly indicated we are in a process of the normalisation of interest rates,” said Lings. “We have started that process, and the argument could be that we need to continue because South Africa is vulnerable, mainly through our current account and foreign capital flows.”
The US this month ceased its bond-buying programme known as quantitative easing, indicating that a hike in the US interest rate is imminent. That could leave South Africa exposed if it does not consider pre-emptive action.
Du Plessis agreed that a hike in the US interest rate would be a reason to for South Africa to raise interest rates again. “[Our] reliance on foreign capital may mean that rates have to increase to ensure the country remains competitive in terms of global money flows,” he said.
“The ending of quantitative easing in the US, and the likely start of their rate normalisation in the first half of next year means that for South Africa to attract the foreign capital flows to support our budget and capital account deficits, we may have to have higher interest rates.”
Du Plessis said South Africa may also need a higher interest rate to attract foreign capital. “The downgrade of Eskom to below investment grade last week by [ratings agency] Moody’s highlights the risk that South Africa may struggle to attract capital in the future.”
The Reserve Bank has made known its intention to normalise the rate – it is just a question of when it decides to do that.
“Do they take their time, because the economy is weak and inflation is going to move lower?” asked Lings. “Internationally, there is very little urgency to hike rates – so maybe we have time and can leave them alone for now … The counter-argument would be, if inflation does come down from here, hiking interest rates will be less palatable, less possible – so there is a window now to normalise and rather put rates on hold later.”