The odds have gone up for an interest rate hike in SA next week, after better-than-expected US jobs data shored up the dollar.
There is now a 70% chance of a rate increase next week compared with 40% earlier, according to the forward rate agreement market.
In this market, parties contract to fix a future interest rate for a period in the future.
It is typically used by market participants who wish to hedge against future interest rate risks by agreeing on that future interest rate long before then.
Although not always accurate, developments in this market are considered a key indicator of what could happen to rates.
Another possible push for higher interest rates is rand weakness, which in turn stokes inflation, itself a big worry for the Reserve Bank.
Credit Guarantee Insurance senior economist Luke Doig put the chance of a 25-basis points rate hike next week at 60%.
But weak economic growth warranted accommodative monetary policy: “Emerging market currencies are under pressure and with the rand now some 25% weaker against the US dollar since December last year, can we afford to stand idly by?” he asked.
Investec chief economist Annabel Bishop did not expect a rate hike mainly on weak economic growth. Higher interest rates this year and next would not quell rand weakness, but economic growth. The longer economic growth remained below 2% a year, the more likely SA would see credit ratings downgrades, she says.
The Reserve Bank’s monetary policy committee will meet from Tuesday to Thursday next week after which they will release their statement and decision on rates.
It would be “disastrous” if rates were raised only to be followed by an announcement that SA had entered recession, Doig says.
Gross domestic product data out later this month will confirm whether or not SA has entered recession — two consecutive quarters of economic contraction.
The economy contracted 1.3% in the second quarter, although some analysts believed revision to the data would show a smaller contraction.
Jobs data such as those released on Friday — pointing to an improving US economy — fuel speculation that the US Federal Reserve could lift rates next month.
A rate hike in the US would support the dollar and cause more rand weakness.
A hike locally would be “a minor positive” for the rand, says Rand Merchant Bank currency strategist John Cairns, who tipped rates to be kept on hold next week.
The rand fell to lows of R14.24/$ on Monday afternoon as investors avoided emerging-market currencies amid expectations for interest rates to go up in the US next month.
The rand regained some of the losses later in the day.
If the rand weakness is seen to stoke inflation beyond what is anticipated, the Bank could be forced to raise rates by 25 basis points next week.
The Bank expects inflation to breach the 3%-6% target band in the first and final quarters of next year.
The Bank stood ready to act if inflation and inflation expectations rose further, deputy governor Francois Groepe says on Friday, adding rate hikes would be gradual in light of weak economic growth.
The repo rate was last lifted by 25 basis points to 6% in July this year. Last year, rates went up twice — in January and July.
By Ntsakisi Maswangayi for www.bdlive.co.za