It’s that time again! The Reserve Bank will shortly announce its decision on the repo-rate and here is our prediction:
Inflation is comfortably in the SARB’s target band of 3 – 6% and has been for 6 months. The economy remains sluggish and consumers remain heavily indebted. Therefore there is no incentive, at present, to increase or decrease the interest rate. There will therefore be no change to the interest rate. Most economists agree that the repo-rate will remain stable at 5.75% until at least the fourth quarter of 2015 but there are three things to keep an eye on that could cause rates to move sooner:
- Oil Price:
If there is a sustained increase to the oil price this will have a massive impact on inflation particularly as the fuel levy has been increased and the Rand is near record lows against the dollar. An increase in the oil price will put significant pressure on the SARB and they might pro-actively up the rates to counter the worst effects of a price hike.
- US Federal Reserve:
The Federal Reserve has been hinting (to put it mildly) that an increase to its rates is coming soon. This would see an end to record lows and signal that the world largest economy is firmly on the path to recovery. It would also mean that investment in the US would become more attractive and would likely result in massive capital inflows. This in turn would mean massive capital outflows from the developing world, of which South Africa is part. This would devalue our currency further against the dollar and would likely trigger a large jump in inflation. To counter this, the SARB would need to hike rates (thereby making returns on foreign investment more favourable) just before the Fed or very soon after. Given the track record of SARB over the last two years the latter is more likely.
Those two external forces would play a huge role in future rates decisions but there are a few internal factors that play an equally large role. The two to focus on right now would be taxes and Eskom price hikes. The raft of tax increases introduced in February, including an increase to the fuel levy, will certainly exert upward pressure on inflation and the coming Eskom price hikes will also serve to increase the cost of living and doing business. This one-two punch combination alone could cause the SARB to hike rates but taken together with a hike from the Fed or an oil price increase (or both! Eek!) would create a perfect economic storm and finally force their hand. In this situation we might even see a return to .5% or 1% changes to the rate.
Though dark clouds loom on the horizon we are currently enjoying some very mild weather. Or as the ratings agencies put it: we are stable but have a negative outlook. We remain at the mercy of external forces and the weight of Eskom’s implosion, government failures and enormous tax burdens threaten to sink us. This gloomy picture looks set to stay this way well into 2016.