Rate hikes ‘to begin sooner’

By Ethel Hazelhurst - Business Day - May 30th 2011

The rate rising cycle could start as early as September, according to Hugo Pienaar, the chief economist at the University of Stellenbosch’s Bureau for Economic Research (BER).

At a presentation in Johannesburg on Friday, he said the BER had brought forward its forecast for a half percentage point rise in the Reserve Bank’s repo rate from November, in view of rising inflation risks.

He forecast the first hike would be followed by another half percentage point increase in November and a further full percentage point increase in the first quarter of next year.

The Reserve Bank has left its repo rate unchanged at 5.5 percent since November last year, after cutting from a high of 12 percent in December 2008.

After the bank’s monetary policy committee (MPC) meeting earlier this month, governor Gill Marcus predicted inflation would breach the ceiling of the Reserve Bank’s 3 percent to 6 percent target range by the fourth quarter and would average 6 percent next year. Inflation, which troughed at 3.2 percent in September last year, had climbed to 4.2 percent by April.

Despite Marcus’s grim prognosis, most economists held to the view, after the MPC meeting, that the repo rate would remain unchanged until November, at the earliest, and most forecast a hike only in the first quarter of next year.

At least one other institution subscribes to the minority view that a hike could come earlier. JP Morgan economist Sonja Keller has confirmed that she stuck to her April forecast that rates would start to rise in September. Previously she had predicted November.

Financial markets, however, are signalling a 50 basis point rise only in November, according to Ian Cruickshanks, the head of strategic research at Nedbank Capital. He said forward rate agreements (FRAs) – contracts that run for three months starting at a point in the future – were seeing the repo rate at 6 percent by November.

He said Nedbank Capital predicted the first upward move would come only early next year. The outlook for inflation has become more negative because of global trends in fuel and food prices. But Pienaar said: “The rand has been keeping inflation at bay.” And though the exchange rate has lost some ground against the dollar, to trade around R7, “it remains well supported”.

He spoke of a “dramatic turn” since mid March in portfolio investment by non-residents. “Whereas foreign investors were net sellers of South African stocks and bonds to the value of almost R16 billion by mid March, the figures for the year to May 20 show a significant reversal to a positive R24bn.” And he referred to potential foreign direct investment inflows as foreign investors targeted stakes in local companies Freeworld, Metorex, Wesizwe and Massmart.

But a major reason for rand strength, he said, was dollar weakness against the euro. “Not only is the US dollar expected to remain fairly soft in the foreseeable future, but commodity prices are also forecast to remain well supported for the rest of 2011.”

He forecast that the dollar would end the year at around R7.30. But he warned of rand weakness next year “once countries such as the US start to normalise monetary policy”.

Higher interest rates abroad would reduce the relative attractions of local markets.

Pienaar said this “realignment of global capital” would coincide with a worsening of the current account deficit. The gap is traditionally funded by capital flows which at that point would be on a declining