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Reserve Bank likely to take its lead on interest rates from the US

19 May 2015 Jean-Pierre du Plessis, Prescient Investment Management
Jean-Pierre du Plessis, Fixed Interest Strategist at Prescient Investment Management.

Jean-Pierre du Plessis, Fixed Interest Strategist at Prescient Investment Management.

Little is expected in the way of interest rate changes when the Reserve Bank’s Monetary Policy Committee (MPC) meets next week.

Jean-Pierre du Plessis, Fixed Interest Strategist at Prescient Investment Management, commented that, while the new governor, Letsetja Kganyago, has been more hawkish in his recent statements, it is clear that there is no near term domestic demand-driven overheating in the economy that is going to cause the Reserve Bank to raise interest rates. 

“We have seen a period of low inflation caused mostly by oil price weakness in the latter stages of last year and the beginning of 2015. The latest consumer price inflation (CPI) reading at 4% is well within the Reserve bank’s 3% to 6 % inflation target range. 

“More worrying is that core inflation has continued to creep upwards, coming in at 5.7% in April. As a result, the headline number is widely expected to breach the upper 6% inflation target later this year,” he said. 

With the first quarter gross domestic product (GDP) number out on 26 May, and expected by the Bloomberg survey to show growth of 1.9% year-on-year, there is little concern about the domestic economy overheating. 

Instead, the MPC will be looking to it’s counterpart in the US to see what the Federal Reserve does with regards to interest rates. 

“Despite a weaker first quarter GDP number, it remains a matter of time before interest rates rise in the US. While the Reserve Bank is on record as saying that the inflation outlook is the main driver of interest rates, keeping a positive interest rate differential to the US will encourage capital flows. 

“These flows are needed to fund our current account deficit which is currently over 5%. The 25 basis point move in interest rates in July last year was a signal that the MPC wanted to get ahead of interest rate rises in the US,” du Plessis said. 

He added that there are pressures on the rand, which the Reserve Bank can’t solve, including concerns over South Africa’s growth rate, higher wages and energy supply problems. However, the Reserve Bank is aware that the currency is a key contributor to our inflation rate. 

“The forward rate agreement market has started to price in rate hikes later this year. This move has in part been driven by weakness in the longer end of the bond market curve, and not necessarily as a result of market expectations of a number of rate hikes. I expect that the Reserve Bank will wait for the Fed to move, and then hike our repo rate,” said du Plessis.

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