Rate hike unlikely - for now


Rate hike unlikely - for now

Published Date: 2019-01-11 | Source: Stephen Gunnion | Author: Stephen Gunnion | Comments

Rate hike unlikely - for now

Investec says rates are likely to remain unchanged for the first half of the year unless there's a further ratings downgrade.

The Reserve Bank is unlikely to hike interest rates at next week's meeting of its Monetary Policy Committee after the US Federal Reserve softened its stance on rates. That's according to economists at Investec, who predict steady rates for the first half of the year followed by a 25 basis point hike in the third quarter.

The Reserve Bank increased the repo rate by 25 basis points to 6.75% in November, citing longer-term risks to the inflation outlook. That took the prime lending rate to 10.25%. Since then, the Fed has turned less hawkish, recognising that US monetary policy can "afford to be patient about further policy firming". While the SARB doesn't follow the Fed's lead on interest rates, unless it maintains an attractive gap between US and SA rates, funds are more likely to be diverted to the US. Higher US rates also support the dollar, which results in higher imported inflation for SA.

Signifiant petrol price cuts in December and this month will take the pressure off of short-term inflation. However, the price of petrol may rise next month following a recovery in oil prices - unless that's matched by a stronger rand. Investec says the SARB doesn't target inflation in the immediate term, but rather twelve to 18 months out. The outlook for inflation in 2020 is, therefore, key to the MPC's current inflation targeting process, with the Consumer Price Index currently expected at around 5.6% year-on-year for 2020, near the upper limit of the bank's 3-6% target. While the petrol price cuts will lower this year's inflation outcome, it will also create a base effect that will likely boost inflation next year, Investec said.

The country's credit ratings remain a risk to interest rates, with Moody's Investors Service expected to review its credit rating in March, following the release of the Budget next month. Moody's is the only one of the three big ratings agencies with an investment-grade rating on both local and foreign currency long-term sovereign debt. Investec said a downgrade by Moody's would likely lead to substantial rand weakness, making further interest rate hikes difficult to avoid.

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