SARB raises interest rates to “good wealth”

By on February 3, 2014

Following predictions that South Africa would only see rate-hikes in early 2015, the South African Reserve Bank (SARB) pushed the repo rate up by 0.5 percent last week, in the hopes of tightening policies and keeping inflation under control. 

Gill Marcus, Governor of the Reserve Bank, said that the increase in interest rate was a response to the current global financial situation. The United States Federal Reserve’s decision to taper quantitative easing, paired with the seeming trend in other emerging-markets to re-assess monetary policy, is what Marcus said was seriously considered in the rate-hike deliberation. She also remains confident in saying that the policy – notwithstanding the increase – is still accommodative. George Glynos, Chief Economist at Entercom Communications Corporation (ETM) Analytics, supports Marcus’ outlook and goes on to say that “rates could quite comfortably be another 50 to 100 basis points higher.”

However, the question then is: can this economically vulnerable South Africa handle another such increase?

South African households and businesses are constrained enough as it is at the moment – thanks to things like e-tolling, petrol-price hikes, etc. – but Colin Wakefield, an interest rate trader at Rand Merchant Bank (RMB), claims that South Africa is still lucky with its current, “lower-than-most” rates. He believes that other emerging markets have turned to far more extreme solutions to combat the global economic crisis:

“Either you take your medicine slowly upfront and hopefully get better slowly,” Wakefield says, “or alternatively you’re going to have to go for some rather drastic therapy later on in order to deal with what is ultimately an inflation problem, given the weakness that we’ve seen in the currency to date.”

Turkey, for example, saw a massive interest rate leap of 5.5 percent, leaving their current rate at 10 percent. Even if South Africa’s actions seem modest in comparison, analysts argue that these first-moves in emerging market economies may be what other struggling nations need in order to find their own confidence in fighting for their currencies and economies.

The market has reacted to the 5.5 percent repo rate with the Johannesburg Stock Exchange (JSE) banking index falling by 2.83 percent, general retailers declining 2.8 percent and financials losing 2.14 percent.

Consumers have been warned that further developments in repo rate hikes will be dependent on the global market movement, which Marcus said SARB would monitor while “markets adjust to the new pattern of global capital flows.”

For now, it’s a case of biting-the-bullet and waiting for the economy to balance itself out, and Glynos believes if we see it through, we’ll make it through:

“The pain that’s going to be had now is going to come through, it’s not going to look pretty, it’s going to be very difficult… but it’s very much a case of the pain that we have to take right now, to try and rebalance this economy … The whole structure of the economy has moved to one where we’ve become more dependent on low interest rates, and that really needs to change.”

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