Global protectionist policies could lead to earlier rate hike for SA

SA’s vulnerability to a global trade war could see an earlier rate hike, an economist warned.

Momentum Investments economist Sanisha Packirisamy on Thursday shared her views on the Reserve Bank’s decision to keep interest rates unchanged at 6.5%. The central bank’s monetary policy committee identified escalating trade tensions among the risks to the inflation outlook.

While inflation has remained within the 3% to 6% target band, the Reserve Bank’s inflation outlook model projects headline inflation to peak close to the upper end of the target band.

Packirisamy warned of the negative impact protectionist policies would have for the SA economy.

“Rising risk of protectionist policies could prompt an earlier rate hike, given SA’s vulnerability to a global trade war,” she said. SA has extensive links to global value chains and may be exposed to higher price pressures.

Momentum Investments, however, expects interest rates to remain steady at 6.5% until the first 25 basis point increase in 2019.

Maura Feddersen, economist at PwC Strategy&, said the SARB's worsening inflation outlook is increasingly hawkish. This suggests two interest rate hikes of 25 basis points each may be possible before the end of 2018, possibly on the September and November meetings. This is earlier than the group's previous expectations of a hike only in 2019. 

"Should the key risks to the inflation outlook moderate, especially current exchange rate and fuel price risks, the SARB may decide to keep interest rates on hold for longer, delaying the first interest rate hike to 2019," said Feddersen.

Investec economist Lara Hodes, meanwhile, also noted the central bank's concerns over pressure from developments in the international environment on inflation, in addition to challenging domestic growth which was revised down from 1.7% to 1.2%.

Hodes said previously four rate hikes of 25 basis points by the end of 2020 were projected by the SARB’s model, but now five rate hikes have been implied.

Bianca Botes corporate treasury manager at Peregrine Treasury Solutions said potential rate hikes in the first half of 2019 are now more likely to take place.

FNB chief economist, Mamello Matikinca expects the monetary policy committee to keep rates at current levels throughout 2018, in the absence of any shocks to inflation.

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