There is little evidence that the interest rate cycle in South Africa has peaked and it is likely that there will be more rate hikes this year‚ says Investec economist Annabel Bishop.
“South Africa has now hiked interest rates by 2% in the current upwards interest rate cycle (which began in 2014)‚ where the rand has depreciated from R10.63/USD‚ R14.42/EUR and R17.37/GBP to R14.39/USD‚ R16.22/EUR and R20.63/GBP.
“This year the rand reached the historic weak point of R16.97/USD‚ R18.58/EUR and R24.68/GBP in January‚ before pulling back materially as risk aversion levels subsided globally with strong flows into emerging market (EM) portfolio assets (bonds and equities).
“While a tailing down in hawkishness could be expected on the recent rand strength‚ with an unchanged interest rate outcome in May‚ particularly given the rand’s substantial pull back‚ the SARB is instead still particularly hawkish‚ even despite the weakness of domestic economic growth‚ which has fallen to 0.2% quarter on quarter‚ seasonally adjusted in Q3 and Q4.15‚” Bishop notes.
Additionally‚ the risk of recession is real for SA this year and the SARB is following a different monetary policy paradigm than in 2009‚ when it cut interest rates. That was despite CPI inflation peaking at 13.00%‚ food price inflation in double digits and material rand weakness‚ with the economy also at risk of recession (one quarter of contraction had occurred already)‚ she points out.
The South African economy actually went into recession for three quarters‚ from the end of 2008 to first half of 2009‚ and the SARB made the correct response at the time by cutting the repo substantially from 12.00% over the next few years‚ reaching 5.00% by 2012‚ Bishop believes.
“The very hawkish nature of the SARB this time around leads us to believe that further interest rate hikes will occur this year‚ of at least 75bp‚ a 25bp hike in May‚ another 25bp in July‚ and a third hike in September of the same magnitude. The FRA (the Forward Rate Agreement) curve currently factors in about a 75bp hike‚ down from closer to 2.00% in January‚ although a 75bp has since occurred.
“Currently there is little evidence that the interest rate cycle in South Africa has peaked‚ and while we continue to believe the SARB should pause‚ it seems more likely they will hike interest rates further this year‚” Bishop says.
Further rate hikes this year likely‚ says economist
There is little evidence that the interest rate cycle in South Africa has peaked and it is likely that there will be more rate hikes this year‚ says Investec economist Annabel Bishop.
“South Africa has now hiked interest rates by 2% in the current upwards interest rate cycle (which began in 2014)‚ where the rand has depreciated from R10.63/USD‚ R14.42/EUR and R17.37/GBP to R14.39/USD‚ R16.22/EUR and R20.63/GBP.
“This year the rand reached the historic weak point of R16.97/USD‚ R18.58/EUR and R24.68/GBP in January‚ before pulling back materially as risk aversion levels subsided globally with strong flows into emerging market (EM) portfolio assets (bonds and equities).
“While a tailing down in hawkishness could be expected on the recent rand strength‚ with an unchanged interest rate outcome in May‚ particularly given the rand’s substantial pull back‚ the SARB is instead still particularly hawkish‚ even despite the weakness of domestic economic growth‚ which has fallen to 0.2% quarter on quarter‚ seasonally adjusted in Q3 and Q4.15‚” Bishop notes.
Additionally‚ the risk of recession is real for SA this year and the SARB is following a different monetary policy paradigm than in 2009‚ when it cut interest rates. That was despite CPI inflation peaking at 13.00%‚ food price inflation in double digits and material rand weakness‚ with the economy also at risk of recession (one quarter of contraction had occurred already)‚ she points out.
The South African economy actually went into recession for three quarters‚ from the end of 2008 to first half of 2009‚ and the SARB made the correct response at the time by cutting the repo substantially from 12.00% over the next few years‚ reaching 5.00% by 2012‚ Bishop believes.
“The very hawkish nature of the SARB this time around leads us to believe that further interest rate hikes will occur this year‚ of at least 75bp‚ a 25bp hike in May‚ another 25bp in July‚ and a third hike in September of the same magnitude. The FRA (the Forward Rate Agreement) curve currently factors in about a 75bp hike‚ down from closer to 2.00% in January‚ although a 75bp has since occurred.
“Currently there is little evidence that the interest rate cycle in South Africa has peaked‚ and while we continue to believe the SARB should pause‚ it seems more likely they will hike interest rates further this year‚” Bishop says.
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