Interest rates look to rise end 2015 in line with Prescient calculations earlier this year

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

The Reserve Bank will most likely hike the repo rate by 25 basis points when the Monetary Policy Committee (MPC) meets next week on November 17. Jean-Pierre du Plessis, Fixed Interest Strategist at Prescient Investment Management, commented that last Friday’s much stronger than expected non-farm payroll number in the US has resulted in a much larger probability that the US will raise rates at its next meeting.

“This has led to widespread weakness in emerging market currencies versus the US dollar, and the Rand has declined over 10% in the last two weeks. Concerns over the impact of the weakness in the currency and the resultant inflation impact have led to the market pricing in a 25bps hike at next week’s meeting,” points out du Plessis.

“However much of the currency weakness has been dollar driven, and in fact, we are not at the weakest levels of the Rand on a trade weighted basis. The difficulty for the Reserve Bank is that inflation is not as a result of demand driven over-heating, which can be resolved by higher interest rates, but is rather the result of supply driven pressure.”

What is also unclear is that higher interest rates will result in stabilising the currency given the general concerns over emerging market growth, and in particular, commodity producing countries that have resulted in the Rand weakness.

“The balance of risks are now clearly in the favour of another rate hike and some may even argue for more aggressive action given the currency weakness we have seen. However, excessive rate hikes may lead to a more marked slowdown in the economy, which is both unwanted, and may in fact lead to further currency weakness’ concludes du Plessis.