In the grip of recession, SA may consider rate increase

(iStock)
(iStock)

South African policy makers may be about to consider whether to follow counterparts from Russia to Turkey and raise interest rates - even when the country is battling a recession.

Investors and economists are divided on the chances that officials will respond to emerging-market turmoil with the country’s first upward move in borrowing costs since 2016. While forward-rate agreements suggest there’s a chance of an increase on Thursday, just three of 19 economists in a Bloomberg survey expect that.

The SA Reserve Bank is contending with a currency that’s lost 17% to the dollar this year, inflation near the upper end of its target band, expectations for quicker price growth, and pressure to increase the rate to keep up with the momentum of other jurisdictions.

The economy entered its first recession since 2009 in the second quarter.

"We have to make peace with a weaker rand and that may force them to hike," said Abri du Plessis, an economist at Gryphon Asset Management who forecasts a 25 basis-point increase to 6.75%. "I would not, even at this upcoming meeting, put it off the table."

Raising the rate may knock chances of an economic recovery. Loosening policy could lessen the appeal of South African assets for investors searching for yield.

Russia, Turkey

Last week, Russia’s central bank raised its key rate for the first time in four years to 7.5%, while Turkish officials increased the rate by 625 basis points to 24%.

There’s a week to go before the US Federal Reserve delivers what could be its third interest-rate increase of the year, which may quicken the sell-off of emerging-market assets and further knock the rand.

While the Reserve Bank may look at the benchmark rate relative to emerging-market peers, the recession will see the bank hold the rate, said Elna Moolman, an economist at Standard Bank [JSE:SBK].

"The SARB can still delay any interest-rate hikes," she said. It will only raise "if it is concerned that a lack of action following the sharp depreciation of the rand will negatively affect its inflation-targeting credibility."

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER

ZAR/USD
17.45
(+0.15)
ZAR/GBP
22.74
(+0.43)
ZAR/EUR
20.58
(-0.19)
ZAR/AUD
12.51
(-0.02)
ZAR/JPY
0.16
(+0.56)
Gold
1919.74
(+0.74)
Silver
25.52
(+2.81)
Platinum
928.15
(+0.93)
Brent Crude
44.46
(-1.09)
Palladium
2135.00
(+2.60)
All Share
57417.28
(+0.44)
Top 40
53126.54
(+0.56)
Financial 15
10139.85
(-0.74)
Industrial 25
76210.18
(+0.91)
Resource 10
58992.57
(+0.54)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 975 votes
It depends on how the funds are used.
74% - 6473 votes
No. We should have gotten the loan elsewhere.
15% - 1341 votes
Vote