Interest rate hike expected

Many experts believe that an interest rate hike will be announced by the South African Reserve Bank (SARB) on Thursday. The SARB Monetary Policy Committee (MPC) is meeting for the first time in 2016 to decide on interest rates. There is a mixed opinion, however, about how much interest rates will be increased by, with some stating a 25 basis points (bp) (0.25%) increase is likely, and others claiming that it will be increased by 50bp (0.5%).

What the experts are saying
Mamello Matikinca, an economist at First National Bank (FNB), noted on Friday: “The recent Rand weakness along with rapidly rising maize prices has raised the risk that inflation will move above the SARB’s 3% - 6% target for the majority of 2016. As a result we expect the SARB to hike the repo rate by 25 bps next week. There is a possibility that given the inflation concerns, the SARB may look to hike by 50 bps instead. However, we think that the current economic weakness will encourage the SARB to take a more measured approach.”

John Loos, household and property sector strategist, FNB Home Loans, agreed, stating: “Another rise in CPI (Consumer Price Index) inflation in December, from a previous month’s 4.8% year-on-year to 5.2%, contributes to our expectation of another 25 basis points Repo Rate hike on Thursday when the interest rate decision gets announced. This would raise the Repo Rate to 6.5%, and Prime Rate to 10%.”

Peter Attard Montalto, research analyst at Nomura, noted that he believes a 50bp hike is on the cards. Furthermore, Nomura has updated its inflation forecast for South Africa, which now estimates average inflation for 2016 at 6.5% and 6.7% in 2017.

“A 75bp or 100bp hike would be a pleasant surprise, but carrying only a 25% probability. We think a 25bp hike would be a policy mistake and would signal it is too worried about growth over inflation and too happy to be behind the curve with serious inflationary pressures building up. We assign a 15% probability to a 25bp hike. We attach a 0% likelihood to rates unchanged and therefore a 60% probability to a 50bp hike,” stated Montalto.

The reason for the possible increase
According to experts, there are a number of reasons why the SARB will increase interest rates. According to Loos, among some of the factors that may be considered during the MPC meeting is the depreciation of the Rand in recent weeks, as well as the rising import price inflation, and the effect of the drought on rising food prices. However, he noted that even if these are not considered, “the SARB would do well to continue with its gradual interest rate hiking for the foreseeable future for other, more household finance-related, reasons.”

Montalto added: “The SARB has been careful in its rhetoric ahead of [this] week's MPC meeting. On the one hand it wants to show it remains resolute and credible and will hike in response to a shifted outlook, but on the other hand it also wants to contain market perceptions of a large panicked hike. We think the median of the MPC is still aware of growth being weak and as such wants to hike the minimum amount possible. That means inflation concerns are still offsetting growth fears to allow a 50bp hike, but with such a move being stopped from being bigger and getting ahead of the curve.”

Furthermore, Montalto noted that changes in food prices and the Rand are a challenge to inflation, and are factors that are important to watch. “We think a big move in the CPI forecast would result in questions being asked about why the SARB is behind the curve, why it did not go further in hiking rates, move the forecast too little, it looks non-credible and is trying to justify not moving rates more.”

What does a rate hike mean for consumers?
If a rate hike is announced, regardless of the value of the increase, it will affect consumers’ pockets. With a rise in the repo rate, consumers can expect to pay more for their debt, including home loans, car finance, store cards and credit cards.

With food prices looking to increase due to the ongoing drought and the need to start importing things such as grain, in order to meet the country’s demand, a repo rate increase could have a devastating impact on some people’s finances. If you are already struggling with debt, a repo rate hike might be the thing to tip you over the edge.

According to Loos, gradual rate hiking should make consumers more cautious about borrowing over time, which should hopefully keep household credit growth slow, and below the growth rate in disposable income.

“Household credit growth is not an official target of the SARB. But we believe that at the moment it would promote future household financial stability should rising interest rates sustain the downward pressure on the Debt-to-Disposable Income Ratio,” said Loos.

However, it is not all bad news. If you have a savings account, the interest on your account should increase with the repo rate, meaning that while you may be paying more for certain things, you will be earning more on your savings.

“In short, under the current circumstances of investor jitters, a lack of foreign capital and high levels of currency volatility, the best medicine the SARB could possibly give us is a pro-active gradual lifting of interest rates, nudging both the household sector, and indeed the entire economy, towards living within its means, lowering debt burdens and raising savings rates. This is not “growth-positive” in the short term, but can reduce the impact of “external” shocks in the longer run,” added L