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Interest rates set to remain unchanged

19 Nov 2013

With the Reserve Bank’s Monetary Policy Committee (MPC) expected to announce the interest rate decision on Thursday, Investec’s Annabel Bishop is of the view that the repo rate will remain unchanged although the weakness of economic activity urgently signals a cut is needed.

Bishop is of the opinion that there is no need for the Reserve Bank to hike rates, pointing out that impairments are sitting at 48 percent of credit active consumers (currently 20 million) from 36 percent in 2011 (45 percent at the end of recession in 2009) and growth for credit is easing – bank provision of unsecured lending is tightening and household financial stress has increased.

Writing in the MPC Preview report, Bishop explains that the Rand is slightly stronger as no change to repo decision is already priced by markets.

Bishop points out that the Rand and the bond yields market continue to be influenced to a greater degree by Federal Open Market Committee’s (FOMC) communications and US data releases.

Foreigners hold a third of South Africa’s Rand denominated bonds and yields have risen with the 10 year government bond now recording 7.70 percent in SA from 6.74 percent at the start of the year.

According to Bishop, the Rand has strengthened in the last few days to R10.10/USD, R13.64/EUR and R17.25/GBP from R10.32/USD, R13.91/EUR and R16.60/GBP earlier last week.

She says while some expect the Reserve Bank to hike interest rates early in 2014, the economy continues to be slow, way below its potential growth rate.

It is unlikely the Reserve Bank will hike interest rates when economic growth is running so substantially below its potential, as rate hikes in an environment where the consumer is already highly overindebted would merely result in further slowing in the pace of economic growth, she notes.

Bishop is of the opinion that there is no need for the Reserve Bank to hike rates, pointing out that impairments are sitting at 48 percent of credit active consumers (currently 20 million) from 36 percent in 2011 (45 percent at the end of recession in 2009) and growth for credit is easing – bank provision of unsecured lending is tightening and household financial stress has increased.

“We expect that interest rates will remain unchanged this year and next and the Reserve Bank should not hike interest rates before FOMC increases interest rates,” adds Bishop. – Denise Mhlanga

About the Author
Denise Mhlanga

Denise Mhlanga

Property journalist at property24.com

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