Crunch time for interest rate hike

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

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever. But it comes at a cost. Advertisers are cancelling campaigns, and our live events have come to an abrupt halt. Our income has been slashed.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years. We’ve survived thanks to the support of our readers, we will need you to help us get through this.

To help us ensure another 35 future years of fiercely independent journalism, please subscribe.

Rene Vollgraaff
Guest Author

Where is the deputy president?

David Mabuza is hard at work — it’s just not taking place in the public eye. The rumblings and discussion in the ANC are about factions in the ruling party, succession and ousting him

Zuma turns on judiciary as trial nears

Former president says pre-trial correspondence is part of another plot

SANDF inquiry clears soldiers of the death of Collins Khosa

The board of inquiry also found that it was Khosa and his brother-in-law Thabiso Muvhango who caused the altercation with the defence force members

Lockdown relief scheme payouts to employees tops R14-billion

Now employers and employees can apply to the Unemployment Insurance Fund for relief scheme payments

Press Releases

Covid-19 and Back to School Webinar

If our educators can take care of themselves, they can take care of the children they teach

5G technology is the future

Besides a healthcare problem Covid-19 is also a data issue and 5G technology, with its lightning speed, can help to curb its spread

JTI off to court for tobacco ban: Government not listening to industry or consumers

The tobacco ban places 109 000 jobs and 179 000 wholesalers and retailers at risk — including the livelihood of emerging farmers

Holistic Financial Planning for Professionals Webinar

Our lives are constantly in flux, so it makes sense that your financial planning must be reviewed frequently — preferably on an annual basis

Undeterred by Covid-19 pandemic, China and Africa hold hands, building a community of a shared future for mankind

It is clear that building a community with a shared future for all mankind has become a more pressing task than ever before

Wills, Estate Administration and Succession Planning Webinar

Capital Legacy has had no slowdown in lockdown regarding turnaround with clients, in storing or retrieving wills and in answering their questions

Call for Expression of Interest: Training supply and needs assessment to support the energy transition in South Africa

GIZ invites eligible and professional companies with local presence in South Africa to participate in this tender to support the energy transition

Obituary: Mohammed Tikly

His legacy will live on in the vision he shared for a brighter more socially just future, in which racism and discrimination are things of the past

The best local and international journalism

handpicked and in your inbox every weekday