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By Arthur Kamp, July 2014
The South African Reserve Bank (SARB) has indicated it believes interest rates will need to be increased further. However, it has also suggested there is no urgency regarding hiking the rates. Deputy Governor of the Reserve Bank, Daniel Mminele noted during his speech at the SARB Financial Markets Department’s annual cocktail function on 24th June “… the current rate cycle need not match the speed and magnitude of earlier cycles”, partly due to the absence of material demand pressure on prices.
In addition, real interest rates abroad are still very low / negative. And, presently, developed economies cannot afford a sharp increase in real interest rates.
Importantly, too, the SARB’s own medium term inflation forecast shows inflation settling within its inflation target range through next year. On current information this is a reasonable forecast if the Rand remains stable. Recent sharp falls in domestic grain prices at producer level, if sustained, are also especially helpful.
All of the above suggests the SARB can remain at ease.
But, there is increasing evidence emerging in the inflation data pointing to pass-through effects from Rand depreciation into prices. I suppose one could ignore this and hope it fades without any lasting impact on inflation expectations and wages, if the Rand remains stable. Yet, the risk of higher than expected inflation outcomes is significant and we know central banks are concerned about inflation expectations. South Africa’s inflation expectations have remained relatively well anchored, but are close to the 6% upper limit of the inflation target range. Ostensibly, it is easier to prevent a surge in inflation expectations while they remain contained than to rein in expectations once they have bolted. The latter could turn a mellow interest rate hiking cycle into something rather more stringent.
The bottom line is the SARB’s communication strongly suggests the Bank intends increasing its repo rate again at some point. Given the apparent split between members of the SARB MPC in May (about whether or not to hike the Bank’s repo rate) it is hazardous to guess as to exactly when this point will be reached. However, inflation is significantly above 6% (6.6% in May 2014) and inflation expectations, while stable, are elevated. Further, although real interest rates abroad are expected to remain low for an extended period, they are unlikely to remain as extraordinarily low as they currently are. This suggests a further repo rate hike this week would be no surprise.
After all, slower should not mean never.