Can we expect an interest rate hike?

Could we expect an interest rate hike at the next Monetary Policy Committee (MPC) meeting this week (Thursday, 23 July 2015)? John Loos a household and property sector strategist at the market analytics and scenario forecasting for First National Bank Home Loans, believes that a rate hike is imminent.

“After having repeatedly warned South Africa of the need to continue to “normalise” interest rates upward, we expect that the South African Reserve Bank (SARB) may resume interest rate hiking at the next MPC meeting,” said Loos.

Inflation target

The SARB has a CPI (Consumer Price Index) inflation target of 3% to 6%, and while the June CPI inflation rate was only 4.6%, it has been rising steadily in recent months, explained Loos.
Additionally, the oil price drop at the end of last year is expected to take the rate higher in the coming months, said Loos. This could result in the upper target of 6% being breached by year end.

“This probability, we believe, could lead the SARB to behave pro-actively, raising interest rates 25 basis points (0.25%) next week and by half a percentage point (0.5%) in total within the next 12 months,” said Loos.

Currently the rate is at 5.75%, a rate hike of 0.25% will see the rate hit 6%.

However, Loos said that 0.25% now, and 0.5% by year end, should hardly seem something to worry too much about, and indeed it probably shouldn’t be.

“Gradual”, said Loos, appears to be the SARBs motto, trying to raise rates without any significant “shock” to a fragile economy.

Financially weak consumer

South Africa’s saving culture has always been concerning with household net dissaving at -2.3% of disposable income, according to Loos.

“This is a “shocker” with regard to households’ building of financial independence and preparedness for retirement,” said Loos.

He said that household credit growth shows little in the way of “crazy” behaviour, and is only just above 3% year-on-year according to the monthly SARB figures.

The low saving, as well as the slow household credit growth is another reason as to why the MPC should up the interest rates.
“While the “consumer culture” of modern day consumers appears tough to break, we believe that the SARB should at least raise interest rates in order to constrain consumption expenditure growth and hopefully “coax” net dissaving back into net saving,” said Loos.

Even though a gradual interest rate hiking in the near future may not feel great, and will have many people tightening their belts, South Africans may be grateful for it and the change in behaviour it brings, said Loos.