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Will we see another interest rate hike in 2016?

By Jessica Anne Wood

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) will meet for the last time this year next week. Here a decision regarding the interest rate and whether to increase it, decrease it or keep it at 7% will be made. Ahead of the announcement next week Thursday, Justmoney speaks to financial experts about what they expect to happen with regards to the interest rate.

A rate hike?

According to the experts interviewed, the MPC is unlikely to raise the interest rate next week. Andre Botha, a dealer at TreasuryOne, said: “We believe that the MPC will do nothing at next week's meeting. We believe that should normal market forces prevail they are close to the end of their hiking cycle. With anaemic growth in South Africa, further hikes could be detrimental to the South African economy. The expected US hike is mostly priced in the market and one has to wait and see whether the US will adopt an aggressive hiking policy with their new President.”

Dr Azar Jammine, director and chief economist at Econometrix, agreed, stating: “The reason why there won’t be an increase in interest rates is that inflation has been coming in at lower than anticipated and now most recently oil prices have been falling again and this means that we are heading for another reduction in fuel prices.

“Also there have been some good rains which have alleviated some of the potential stress on food supply which will encourage food inflation to come down over the course of next year. The economy is itself quite weak still, and that means that businesses are finding it very difficult to pass on cost increases.

“Finally, and of course the very important thing, is the Rand exchange rate is considerably stronger than it was at the beginning of the year, even though the Rand may well have depreciated a lot last year. For all these factors I think one is likely to see inflation coming back into the inflation target in the second quarter of next year, in line with the Reserve Bank expectations. Nothing has deviated from that at the present.”

According to Floris Slabbert, operations executive at Ecsponent Limited, while South Africans will see the interest rate remain unchanged for now, in the first quarter of next year we may see an increase of between 25 basis points (0.25%) and 50 basis points (0.5%) - alternatively, this may only happen mid-2017.

Pietman Roos, senior consultant at Instinctif Partners, does not believe that an interest rate increase is likely. “The good news is that by their own estimate, inflation is going to be low 6% in 2017, and there is no real indication that there is going to be a bump, that there is going to be inflationary pressure, obviously something might happen, but then they will have to move it,” said Roos.

However, a credit rating downgrade by the Credit Bureaus later this year, could result in the Reserve Bank having to increase the repo rate in the New Year. It is not yet clear whether or not South Africa will receive a credit rating downgrade. Roos noted that a repo rate increase outside of the normal period may result to stabilise the economy if we are downgraded.

Will we see a decrease?

Despite the belief that the interest rate will remain at 7% at the next MPC meeting, Jammine is of the opinion that we are still in the midst of a rate hike. There are a number of factors at play which will prevent the MPC from lowering the interest rate any time soon. “At the moment I still think that we are in an interest rate hiking cycle for the simple reason that led by the United States, the world is about to enter into a rate hiking cycle.”

According to Jammine, a Donald Trump presidency in the United States may see the US raise interest rates. Currently the difference between the US interest rate and the South African interest rate have made investing money in South Africa an inviting prospect. However, if these interest rates start to align, this will be less appealing. “The Reserve Bank is going to be very much aware of the potential for Rand weakness and therefore will not be in a hurry to reduce interest rates any time soon.”

Jammine added: “You have on the one hand constraints on inflation that argue against interest rates rising, but on the other hand you have the fear of US interest rates rising and the fact that the Rand could depreciate sharply in such circumstances, therefore one cannot afford to reduce interest rates significantly at present, which makes for an environment of a flat interest rate, and that is likely to prevail for some time to come now.”

Looking to 2017

Jammine stated that there may be a slight improvement in the economy in 2017 when compared to 2016. There are a number of factors which influence this. Firstly, the drought will most likely be over, and Jammine emphasised the importance of not underestimating the dampening effect that this has had on overall economic activity.

“Secondly and most importantly, inflation has been coming in lower than anticipated and this is alleviating some of the plight of consumers, and associated with this the interest rate has not had to rise the way that we feared they might have to rise early in the year,” said Jammine.

Furthermore, the Rand has performed well over the past six months, and as a result inflationary pressures has diminished. A slight recovery in global conditions for exports has also been noted, as well as the slight rally in commodity prices when compared with January. “We’re not talking about any boom next year, we are just talking about growth coming up from 0-0.5% to somewhere between 1-2%,” highlighted Jammine.

According to Slabbert, 2017 may pose a few ‘bumpy times’ for consumers with regards to inflation, and as such, it is important that they should avoid using credit facilities.

Further reading:

5 Ways in which Trump’s win will affect South Africa

 

 Handy tip: Struggling with debt? You can apply for debt counselling on Justmoney.

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