/ 20 July 2015

Economists predict rate hike ahead of MPC meeting

Consumers are unlikely to get much good news this week as many economists expect interest rates to either stay unchanged or potentially rise.

The South African Reserve Bank’s monetary policy committee will announce its decision on Thursday.

The central bank has for some time indicated its intentions to “normalise” the interest rate environment, preparing the economy for future rate hikes. Whether the committee will ultimately hike rates, and the extent to which they will increase, remains to be seen. Experts however anticipate any increases to be gradual.

Given rising inflation, declines in commodity prices and pressure on the rand, a 25 basis point hike could be on the cards, according to Mamello Matikinca, macroeconomic analyst at First National Bank.

“However, it is an extremely close call as the [committee] must be considering the weakness in the economy and the risk of a further deterioration in the short term,” she said on an economics blog post.

“Add into the mix significant uncertainty around the timing of the first US interest rate hike [and the impact that that will have on the rand] and you have a truly challenging scenario for the [South African Reserve Bank].” 

Although consumers may not want it there was a case for an increase in the long-term, according to John Loos, FNB’s household and property strategist.

The reserve bank has a consumer price inflation target of 3% to 6%.

While June’s consumer price index (CPI) revealed consumer inflation was at 4.6%, “it has been rising steadily in recent months”, said Loos.

“In addition, low base effects created from an oil price drop in the [second] half of last year are expected to take the rate higher in the coming months, possibly breaching the upper target limit of 6% before year-end,” he noted.

According to Loos, this could lead the reserve bank to “pro-actively” raise rates by 25 basis points, and by half a percentage point within the coming year.

He argued that it was necessary to raise interest rates to restore macroeconomic imbalances.

The country runs a “huge” current account deficit. The means that gross domestic investment, which is crucial for long-term economic growth, outstrips gross domestic savings, said Loos.

“The shortfall needs to be funded by foreign capital inflows,” he said. “These inflows have been insufficient in recent years, causing the rand to experience frequent bouts of weakness, and the expected start of US interest rate hikes may constrain these foreign capital inflows even more.”

Although recent household credit growth and home buying showed little “exuberance”, the consumer was “very much part of the current account deficit problem”, said Loos.

Consumer spending is the largest component of gross domestic expenditure.

The level of consumer spend is such that saving by households is so low that it did not even cover the depreciation on fixed assets and as a result South African households were in fact “dissaving” he said.

“This is a ‘shocker’ with regard to households’ building of financial independence and preparedness for retirement, but is also troublesome in terms of households’ saving contribution to overall domestic savings to fund fixed investment in the country,” said Loos.

A rise in interest rates would hopefully constrain consumption expenditure growth and coax households into net saving, he said.

Unchanged verdict

But Investec’s Kamilla Kaplan said in a research note that, although there was a risk of 25 basis point hike, “inflation and economic growth considerations support an unchanged verdict”.

Internationally data pointed to “ongoing fragility” in economic recovery.

Although the US and UK economies registered some improvements, emerging market and commodity producing countries have experienced weakness, while the International Monetary Fund had downgraded its 2015 global growth forecasts, she noted.

On the domestic front, the industrial sector was “skirting a mild recession” and retail sector growth was modest and could slow further.

“Consumers remain highly indebted and real disposable income growth is likely to be undermined by the rise in personal income taxes, higher petrol prices and the utility tariff hikes,” said Kaplan.

“Further interest rate increases would undoubtedly weigh on already heavily depressed consumer and business confidence.”