Crunch time for interest rate hike

Reserve Bank governor Lesetja Kganyago will reveal if interest rates are to increase, after months of speculation. (Gallo)

Reserve Bank governor Lesetja Kganyago will reveal if interest rates are to increase, after months of speculation. (Gallo)

After months of preparing the market for an interest rate increase, Reserve Bank governor Lesetja Kganyago will make an announcement on Thursday.

Analysts are divided on whether the resolve to fight inflation stoked by a weaker rand and rising food and electricity costs will outweigh concerns about anaemic economic growth.

Investors are “trying to figure out, now that we’ve had the new governor for the better part of the past year, just how hawkish is he and is he able to carry through with the statements that they’ve collectively expressed”, Phoenix Kalen, director of emerging-market strategy at Societe Generale SA in London, said by phone. “This is their opportunity to show the market that they are serious.”

Forward-rate agreements, used to speculate on rates, indicate traders are pricing in a just over 50% probability that the benchmark will be 25 basis points higher in one month. Economists are also divided, with 17 of the 31 surveyed by Bloomberg forecasting the Reserve Bank’s Monetary Policy Committee will raise the benchmark rate by a quarter point on Thursday. The rest predict it will stay unchanged at 5.75%.

Warning on delay
Kganyago and his deputies have repeatedly warned the central bank can’t keep delaying raising interest rates, given that inflation will probably breach the 3% to 6% target and the US Federal Reserve is preparing to tighten monetary policy.
Compounding their dilemma is an economy hit by power shortages, and business and consumer confidence levels are at the lowest in more than a decade.

Complicating the outlook for inflation is the timing of rate increases in the US and how that may affect the rand as investors sell riskier, emerging-market assets. Fed chair Janet Yellen has said that prospects are good for further improvement in the US labour market and economy, keeping the central bank on track to raise rates this year.

The rand has slumped 6.3% against the dollar this year, boosting import costs. A government report on Wednesday will probably show that inflation accelerated to 5% in June from 4.6% in the previous month, according to the median estimate of 24 economists surveyed by Bloomberg.

‘Fundamental reasons to raise rates’
“A lot has changed since the previous MPC meeting, if you look at the increased certainty around the Fed’s move and inflation definitely picking up domestically,” Maarten Ackerman, an investment strategist who helps oversee the equivalent of about $3.2-billion in assets at Cape Town-based Citadel Investment Services, said by phone. “There are fundamental reasons to raise rates.”

The currency weakened 0.1% to trade at 12.34 per dollar as of 9.01am in Johannesburg on Wednesday. Yields on government rand bonds due December 2026 fell 1 basis point to 8.15%.

Some economists see room for the Reserve Bank to hold off raising rates until later in the year once the timing of US policy tightening is clearer, allowing more room for the economy to recover from the slowest growth since the 2009 recession.

“They have a little bit of space, just to sit on the sidelines and see where the Fed settles in terms of its timing for a rate hike before they follow through,” Matthew Sharratt, an economist at Bank of America Merrill Lynch in Cape Town, said by phone. “Near term, I don’t think there is dramatic need to tighten policy, particularly when the growth outlook is so poor.” – Bloomberg

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