Economists expect SARB to raise interest rates again

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Market analysts say it’s inevitable that the Reserve Bank will raise interest rates again at the forthcoming May 25th meeting.

This, following the US Fed’s increasing interest rates by 25 basis points, and the European Central Bank, moving by the same margin this week.

The Reserve Bank always says that it makes its decisions based on all the economic data, both local and international at its disposal and it absolutely denies that it just follows the lead of big central banks like the Federal Reserve in the US.

Dr Azar Jammine, chief economist at Econometrix, says if South Africa doesn’t increase its interest rates in line with international markets then the country losses out on rand denominated bonds which are useful to inject money into the economy.

“As other countries increase interest rates, that puts downward pressure on the rand, because unless we commensurately increase our interest rates, the advantage of taking positions to deposit money in rands or to buy rand bonds is diminished and that compels the Reserve Bank to have to keep pace with interest rates in other countries.”

The local currency has been under serious downward pressure, trading as low as R18.40 against the dollar recently.

Jammine says the general rise in global interest rates has made emerging markets like South Africa less attractive to investors but also notes issues that are peculiar to South Africa as being responsible for the depreciated currency.

“The first, undoubtedly, is load shedding. With load shedding you have lower economic growth, with lower economic growth tax revenues suffer. As a consequence, the ability of the government to fund its expenditure is impaired, implying the potential for an increase in our public debt beyond what was originally hoped for and that is being penalized by international investors who are calling for greater attraction to invest in our bonds and other instruments.”

Jammine adds, “That means selling out the rand to where it’s cheap enough to want to buy these instruments.”

Local market players expect the Reserve Bank to raise interest rates on the 25th of May.

Makwe Masilela from Makwe Fund Managers says, “It’s very important for us to maintain the interest rate differentials between the US dollar and the local currency because if we don’t then the rand might do worse than what it’s doing now. So, we expect the Reserve Bank from here to also increase interest rates by at least 25 basis points and anyway our inflation is still at elevated levels.”

The European Central Bank also raised interest rates by 25 basis points.

Given the inevitability of a further rate hike, the hope for South Africans, who are in debt may be that the South African Reserve Bank (SARB) slows its rate hike pace from 50 basis points at its last meeting in March to 25 basis points this month.