March 2014 Rates Watch – Our Predictions

January’s .5% rate hike took nearly all pundits by surprise, leaving many with bruised egos. Yet most experts agree again that Reserve Bank Governor Gill Marcus will keep the repo rate flat this time.

January’s decision to bump the rate was forced by unfavourable inflation figures and a sinking Rand. Speaking against a hike this time is the fact that while inflation remains high at 5.9% for February 2014 the Rand has rallied somewhat after a terrifying (to those of us traveling or trading abroad) two month period of uncertainty and has remained below the psychologically important R11 to the US Dollar mark for four weeks.

This means that inflation figures for March will likely remain below the 6% threshold and this in turn means there is no immediate need for measures to force inflation lower or safeguard the currency.

Political reasons will also be a factor in keeping the rate steady: Even though the SARB remains nominally above the political fray it is hard to imagine that it would place pressure on the ruling party (the African National Congress) by increasing repayment rates 7 weeks before a general election. This would only serve to alienate individual voters as well further undermine the ANC’s alliance with the trade unions.

That being said it is important to note that softer than expected manufacturing data from China and the current flight of investment from emerging markets in the face of general unrest across these regions (think protest and riots in Thailand, Egypt, Ukraine, South Africa, Brazil, Venezuela and Nigeria) mean that rate hikes remain inevitable later this year.

After taking all of this into consideration our prediction is: no rate hike in March.

Be forewarned: A .5% increases after the election in May is certain. With that in mind and despite our prediction we’d like to see a .25% hike this month. While a hike like this is almost unprecedented in South Africa’s history and represents a significant break from tradition it would also acts as a pre-emptive shoring up of the Rand and a warning to traders, lenders and consumers that future hikes are coming. The purpose of such a warning being the providing of some degree of certainty at a time when bears dominate the emerging market making us look just a little more tasty!

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