Reserve Bank expected to be cautious on rates
Higher oil prices and the sharply weaker rand do look scary from an inflation perspective, but analysts say the Reserve Bank will not act prematurely by hiking interest rates.
SA’s repo rate is now 6.5% and the prime lending rate 10%.
Higher inflation usually necessitates rate increases, with Argentina hiking interest rates by 15 percentage points to 60% on Thursday.
Turkey has not raised rates since the sharp fall of the lira in August, but is accommodating investors by "informal hikes".
"We are not in the same position as Argentina or Turkey as our central bank has credibility," said Sasfin Wealth fixed income trader Alvin Chawasema. The Bank would only act if second-round effects became noticeable through price rises in the economy itself, and not because of some external shock, he said.
"For this, the Bank does not look at historical data in its rate decision, but looks forward to what the situation will be in 12 to 18 months from now," he said.
According to Chawasema the bond market would be sensitive to the possibility of further hikes, should inflationary projections indicate that consumer inflation would spike above the Bank’s 3%-6% target range. "But up to now the R186 benchmark has continued to trade within a narrow band," he said.
Brent crude has risen 16.8% in 2018 to $77 a barrel on Friday. Oil is poised for the biggest monthly gain since April on concern over supply disruptions in Iran. The rand has depreciated 15.8% to the dollar in 2018. In contrast, the Argentinian peso has lost 51% and the lira 42% against the greenback.
The R186 was bid at a yield of 9.03% on Friday.
Latest inflationary data indicates that producer inflation, a precursor to consumer inflation, increased 6.1% in July from 5.9% in June. Consumer inflation rose 5.1% in July from 4.6% in June, with core inflation at 4.3%.
"This relatively benign inflation outlook and weak economy will probably convince the Bank’s monetary policy committee [MPC] to delay hiking rates as long as possible," said Nedbank economist Busisiwe Radebe. She said the Bank would only hike rates if inflation rose in the areas over which it had no control, and not as a response to an external shock such as higher oil prices.
Radebe said there were signs that local spending could be rising, but it was heavily skewed. "We have price inflation at 6.9% for nondurable goods and only 1.4% for durable goods."
She said it was likely the Bank would only hike towards the end of 2019. "We do not see oil prices rising to $100, with the rand probably remaining weak as the US hikes rates."
Investec chief economist Annabel Bishop said while the MPC tended to look through exogenous or external shocks, SA’s monthly petrol and diesel prices had developed an upward trend since 2016, proving this to be more than a once-off exogenous shock.
"Some second-round inflationary pressures are likely to begin entering the system should this upward trend in SA’s petrol and diesel prices persist," she said.
At R16.03/l the petrol price in SA is at an all-time high. The diesel price in August is just 4c/l off its all-time high in July 2018 of R14.44l.
The MPC will meet again on September 18-20.