Rates could rise more often this year

THE Reserve Bank could this year be compelled to raise interest rates more frequently than last year to prevent the rand from pushing up prices, economists said.

This trend could start at the Bank’s first meeting of the year at the end of this month.

At 5.08pm on Monday, the rand was at R16.6565/$ after hitting a record low of R16.7695/$ earlier in the day.

A weak rand stokes inflation and could encourage the Bank’s monetary policy committee to raise interest rates.

Rate hikes attract investors to buy South African assets including the rand, firming the currency. A firmer rand, in turn, eases the pressure on price increases slightly.

The recent “massive underperformance” of the rand made a 50 basis points rate increase later this month a “distinct” possibility despite weak economic growth, said ETM Analytics economist Manisha Morar.

Higher interest rates would go some way in improving SA’s yield differential, or attractiveness, relative to emerging market peers in an environment of global risk re-pricing, Ms Morar said.

Other economists support the idea of more frequent rate hikes this year, but feel the magnitude could continue being modest, as was the case last year.

The Bank could raise rates by a cumulative 100 basis points this year, according to Macquarie Securities economist Elna Moolman.

It would continue to hike rates in 25 basis-points increments, which means rates would be raised at four of the six monetary policy committee meetings this year.

The Bank lifted rates by 25 basis points in July and by another 25 basis points in November last year. These increases were modest and took account slow economic growth. The increases have brought the repo rate — the rate at which the central bank lends to commercial banks — to 6.25%; and the prime rate — the rate at which consumers borrow from commercial banks — to 9.75%.

The Bank has previously said it was concerned about the negative effect of rising interest rates on economic growth, noting that it needed to raise rates in order to tame inflation. Maintaining price stability and ensuring that inflation remains within its target band of 3% to 6% are its main mandates.

“The Bank’s primary mandate remains one of price stability and that further interest rate increases, especially if the currency continues to weaken aggressively, should not be discounted,” said Ms Morar.

The rand has experienced a major weakening since the monetary policy committee’s last meeting in November, posing more risks that inflation could continue escalating in the coming months.

Factors affecting the value of the South African currency are global developments such as rising US interest rates, US dollar strength and economic stimulus programmes in China, along with the sacking of Nhlanhla Nene as SA’s finance minister last month.

Consumers will not only feel the effects of rand weakness through rising inflation and food prices, but through other channels as well.

Motorists will feel the effect through higher petrol prices, and those who prefer imported goods may also have to pay more for these. Forecasts indicate that there could be an 18c/l increase in the petrol price next month.

The continuing drought, electricity tariff increases and the likelihood of a tax increase were among factors that would squeeze consumers this year, debt management company Debt Rescue CEO Neil Roets said.

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