Economists split on which way rates will go

Carin Smith

Cape Town - The SA Reserve Bank (SARB) will probably raise interest rates in anticipation of a likely US interest rate lift-off in December, economists said ahead of the Monetary Policy Committee's decision on rates later on Thursday.

Nedbank's economic unit said the SARB may feel more justified now to raise rates than in July as the inflation outlook has deteriorated somewhat due to the weaker rand and higher food prices.

Stats SA announced on Wednesday that annual consumer inflation increased to 4.7% in October from 4.6% in September, mostly in line with market expectations. On a monthly basis prices increased by 0.3% as a result of, among others, contributions of 0.1 percentage points each by the food and non-alcoholic beverages as well as the transport categories.

Nedbank said it expected the main part of the SARB's hiking cycle to be in the first half of 2016, as the MPC responds to rising inflation and interest rate normalisation in the US.

Nomura's emerging markets analyst Peter Attard Montalto, said the latest CPI data would have no real impact on the SARB's decision, but that it would rather focus on what will happen to interest rates in the US in December.

He expected the SARB to focus on medium-run inflation risks, wage fears and upside skew in the inflation forecast and reckoned the MPC will hike rates by 25 basis points on Thursday.

"Today's decision is still ultimately about risk management with respect to the FOMC lift-off in December... is (it) worth taking the risk of not hiking tomorrow and the FOMC going in December? We don’t think the MPC will take that risk and will hike by 25bp."

John Loos, household and property sector strategist at FNB Home Loans, expected the SARB to keep rates on hold on Thursday because of the inflation impact on lower income groups.

He said housing CPI remains the key “troublesome” part of CPI inflation, but his biggest concern was that the lower income groups continue to have higher CPI inflation, namely an inflation rate of 5.34%. This is mainly due to the impact of food price and public transport inflation on this income group. Public transport CPI has not been deflating this year despite sharply lower petrol prices.