Experts warn on looming rates hike

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inflation_1805627b
The Reserve Bank’s monetary policy committee (MPC) warned last week that there might be a need for interest rate hikes‚ as the outlook for inflation had worsened.

It was a marked change in tone from two months ago when the MPC was at ease with rates remaining unchanged.

Though the MPC left the repo rate unchanged as expected‚ it said the inflation outlook had deteriorated and it would accelerate due to a weak rand‚ above-inflation wage settlements‚ accelerating food inflation and electricity tariff increases.

Reserve Bank governor Lesetja Kganyago said the scope to put interest-rate increases on hold had narrowed.

“At the same time‚ the growth outlook remains constrained by electricity supply concerns and low business confidence‚ and the risks to the growth forecast are assessed to be moderately on the downside‚” he said.

Persistent electricity outages had led to a downward revision of short-term potential growth to between 2% and 2.5%.

The MPC’s hawkish tone supported a forecast of a mid-year rate increase of 50 basis points‚ most likely by July‚ said Standard Chartered head of Africa research Razia Khan.

The MPC’s tone certainly indicated that the next rate change from the Bank would be a hike‚ said HSBC SA economist David Faulkner.

Although he expected interest rates to remain on hold for the rest of this year because of weak growth‚ a relatively stable rand and inflation within the target band of 3%-6%‚ he said a hike could be implemented earlier in the event of a significant and sustained rand depreciation.

Kganyago said future rate increases would depend on domestic and external factors‚ such as how well the economy grew and the extent to which the rand depreciated if the US Federal Reserve (Fed) raised rates.

“The MPC will remain vigilant and will not hesitate to act in order to maintain the integrity of the inflation targeting framework‚” Kganyago said.

Wage and salary increases in excess of inflation and productivity growth also posed risks to inflation. Public servants are still in negotiations with the government over wage increases.

The recent downward trend in consumer food price inflation was expected to change due to severe drought in some maize-producing areas of SA.

The MPC said it was concerned about load-shedding and that though an electricity tariff increase of 11.6% was expected in July this year and July 2016‚ there was a high possibility of significant further electricity tariff increases.

Public Enterprises Minister Lynne Brown said this week that load-shedding costs between R20-billion and R80-billion a month.

The decision to keep interest rates unchanged was unanimous among the six MPC members, mainly due to weak economic growth and uncertainties related to the Fed’s move.

The inflation outlook has deteriorated mainly because oil prices are now higher at $58 a barrel‚ compared with $45 a barrel in January‚ while the rand remains weak and volatile.

The Bank expects inflation to average 4.8% this year‚ which is far higher than January’s forecast of 3.8%‚ but remains within the target band and breach it in the first quarter of next year.

“With inflation likely to remain within the target range this year‚ SA’s interest rates should be left unchanged for as long as the current balance of risks persists‚” North West University Business School professor Raymond Parsons said.

The rand would continue to be the main upside risk to the inflation outlook‚ according to the MPC‚ which said the extent to which higher US rates had been priced into the exchange rate remained uncertain.

The MPC left the economic growth forecast for this year unchanged at 2.2% and marginally revised next year’s projection to 2.3% from 2.4%.

The possibility remained that growth forecasts could be lowered in future given electricity supply shortages and low business confidence.

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