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What to expect from the repo rate announcement

By Jessica Anne Wood

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) is set to announce the repo rate this afternoon. In the lead up to the announcement, there has been much speculation as to the decision, with many stating that the repo rate will remain unchanged at 7%.

The Consumer Price Index (CPI) was released on Wednesday, which saw the CPI increasing to 6.3%, up from 6.1% the month before, which may be considered by the MPC. However, there seems to be a majority belief that this increase in inflation will not impact the MPC’s decision.

A repo rate increase?

Ahead of the release of the CPI inflation results, John Loos, household and property sector strategist at FNB, stated on Monday: “SARB expected to keep interest rates unchanged this week. We believe it is near to the having completed its “upward normalisation” of interest rates, with only one more 25 basis point hike expected late in 2016.”

In a statement last week, Peter Attard Montalto, research analyst at Nomura, said: “We see rates remaining unchanged at 7.00% at [the] MPC meeting, but judge the chance of a hike to be moderately high at around 40%. The decision will likely turn on expectations data out at the same time.”

If the repo rate is hiked now or later this year, it will see the value of debt increasing, along with other expenses. Ian Wason, CEO of DebtBusters pointed out: “An increase in the Repo Rate will most certainly add further financial pressures to already financially strapped consumers, especially those consumers with vehicle finance, home loans, store accounts and other forms of debt linked to the prime lending rate, who will be required to pay even more towards their accounts.”

This view is despite the British Exit (Brexit) vote that took place after the last MPC meeting. “The MPC framework and the way the MPC works have not fundamentally shifted in our view despite Brexit and the fall in global rates, counter to what many investors think. In other words the MPC is still in a hiking cycle, rates are still below neutral and the MPC still wants to get there,” explained Montalto.

CPI and the repo rate

Jason Muscat, senior industry analyst at First National Bank (FNB), noted: “While inflation remains above target (at 6.3%), we expect the MPC to be more tolerant of the breach in light of recent Rand strength, a lower oil price (August fuel price relief), and expectations of easing food inflation pressure. Moreover, the potential for further monetary policy easing in some developed markets, and the weak domestic growth environment should see the SARB keep rates on hold at [today’s] announcement.”

Loos agreed, adding that while the current CPI result may not impact the MPC, the impact of lower commodity prices may exert an upward pressure on CPI inflation later this year. This “leads us to expect one further 25 basis point Repo Rate hike late in 2016,” noted Loos.

On Monday, prior to the release of the CPI, Loos stated: “We expect one further Repo Rate hike of 25 basis points later this year, where-after we expect the SARB to end its latest round of hiking, and for rates to move sideways over the next few years. The Bank had indicated earlier in the rate hiking cycle that it wished to “normalise” interest rates, and with the Repo Rate now positive in real terms, the job is probably not far from done.”

The MPC is set to make the announcement at 15h00 today.

 

 Handy tip: If your debts are starting to worry you, you can apply for debt counselling through Justmoney.

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