SARB could hike interest rate to lure more capital - PwC

Cape Town - Interest rates in South Africa could be kept higher by the monetary policy committee (MPC) of the South African Reserve Bank (SARB) to attract capital inflows, according to global financial services company PwC.

The MPC is due to announce its first interest rate decision for 2018 on Thursday.

"In an environment of tighter global monetary policy, emerging markets like SA could face capital outflows, weaker investment appetite and sustained currency weakness. This could potentially prompt the SARB to keep interest rates higher in an effort to attract capital inflows," PwC said in a focus paper earlier this week.

The SARB's aim is to keep inflation within a target range of 3% to 6% annually. PwC explains that this is in order to protect the value of the rand and the purchasing power of South African consumers.

Bank of America Merrill Lynch expects the SARB to keep the repo rate unchanged at 6.75% on Thursday. This is the bank's view, despite the stronger rand and what it sees as a "window of opportunity" created by macro fundamentals for a 25 basis-point cut.

In the view of Investec chief economist Annabel Bishop, the SARB's monetary policy outlook has likely become "neutral" following the positive impact on the market created by the recent results of the ANC election conference. Deputy President Cyril Ramaphosa was elected new ANC president.

"With many factors pointing to some upwards pressure on SA’s inflation, particularly towards next year, the scope for significant interest rate cuts appears limited," Bishop commented earlier this week.

"The SARB has communicated that, while inflation is lower currently, it could well be temporary and a reduction in long-run inflation expectations would provide a better support for lower interest rates," said Bishop.

"Globally, a faster normalisation of interest rates than currently expected would erode risk-on sentiment, potentially to the point of risk-off with marked rand weakness. The (rand) is likely to remain volatile..."

She pointed out that at the last MPC meeting in November 2017, the MPC’s model showed repo rate hikes of 75 basis points in total by the end of 2019.

Investec, however, forecast only one 25 basis-point increase during that period, namely in November 2019.

Rand Merchant Bank (RMB) analyst Deon Kohlmeyer said all eyes will be on the MPC's rate announcement on Thursday, "with markets getting slightly excited about a potential surprise cut".

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