Brace for an October Rate Hike

If you were among the thousands of South Africans hoping that the August interest rate hike heralded the end of the rising interest rate cycle, then your hopes may soon be shattered. Latest inflation data suggests Reserve Bank Governor Tito Mboweni may have to hike rates again when the Monetary Policy Committee meets this month.

August CPIX figures show a year-on-year increase of 6.5%. This is a moderate improvement on July's 6.7% but still too high to prevent further central bank action. Economists warn that "it is very likely to mean we are going to get an interest rate hike in October." Market commentators believe this hike is "not likely to affect the markets on the equities and rand side, but will have a negative impact on bond yields."

Although the domestic economy is showing signs of cooling and consumer behaviour appears to be moderating, these slowdowns do not support that the central bank has done enough in bringing CPIX back into its 3% to 6% target range.

One of the problems facing the Reserve Bank is that the key drivers of price inflation in South Africa are beyond government's control. The US dollar price of Brent crude oil determines domestic fuel prices. The recent strength in the rand/dollar exchange rate brings little relief because the dollar price of oil is on an unrelenting upward march. The resulting higher price of domestic fuel mercilessly chases up the price of producing and distributing local goods. This is, in itself inflationary and beyond our control.

It appears unfair that consumers are effectively punished on both sides of the equation. Not only do they directly suffer the rampant food prices; but their disposable income takes a hit each time interest rates are hiked too.

Is the raising of interest rates the right way to curb inflation targeting?

The above scenario has prompted many to raise questions about the use of interest rates in central bank inflation targeting. Why should the central bank continually hike rates if these actions have no impact on key inflation drivers? Some suggest the bank is unnecessarily putting the brakes on domestic growth while inflation remains unchecked. This is unfair to consumers.

Only a handful of economists are willing to predict an unchanged interest rate in October while some economists believe that slower global economic growth and signs from domestic consumers are promising; but may come too late to halt the inevitable.

The majority are confident that we will see another 50 basis points rise.

Perhaps it is time for the central bank to consider a slight change to its inflation targeting policy. It is possible that global market conditions differ from those prevailing when the target range was initially set. A shift in the band to rather target a 4% to 7%, or even a 4.5% to 7.5% range may be appropriate given current predictions for global economic GDP growth.

However, a change to central bank thinking on inflation targeting and CPIX ranges is unlikely to happen overnight. We suggest consumers brace themselves for another 50 basis point hike in October.

If you have any queries regarding the above commentary please contact us on 021 683 3380 or info@silke.co.za