Stiff rate hike looming

JANUARY 28, 2016

South Africans are bracing for an interest rate hike of up to 50 basis points on Thursday, as the rand hovers at record low levels.

However, increasing inflationary pressures could dissuade the Reserve Bank at its policy meeting on Thursday from hiking the repo rate by the consensus forecast of 50 basis points.

There was no direction coming from the US Federal Reserve on Wednesday evening as the Fed kept rates steady and indicated that its focus has now moved to looking at gobal markets rather than zeroing in on its own data in determining a rise in rates.

The Fed noted the strong labour market which could still be the main argument for putting up rates in future.

"In South Africa it will be the South African Reserve Bank meeting where a hike of 25 basis is expected, while some are going for 50. If it is the latter, we could see some strength in the rand, but as an importer I would be there to buy some US Dollars below 16.35 and to keep buying it down," said Adam Phillips,  independent treasury specialist to corporates at Umkhulu Consulting, in his morning note to clients.

"We forecast a larger incremental 50bp (basis-point) rate hike this time, given both an extended breach of the 6% target ceiling in our CPI (consumer price index) outlook and heightened inflation risks (in ZAR and food prices mostly)," said Citi Research on Monday.

"No matter which path the South African Reserve Bank chooses, we see a total 100bp (basis point) in rate hikes in 2016. To do a 50bp hike now makes sense to us for it gives the MPC more options in March (pause, +25bp or +50bp) which keeps it ahead of the curve."

On Thursday morning the rand was little changed at R16.43, but the movement in the local unit later in the day "will be governed by the size of the rate hike". PPI data will be released before the Sarb governor speaks at 15:00.