Reserve Bank. Picture: SUPPLIED
Reserve Bank

THE Reserve Bank is likely to raise interest rates on Thursday amid a deteriorating inflation outlook brought about by a weak rand.

The Bank’s monetary policy committee (MPC) begins its meeting on Tuesday and will conclude with a rates decision and an update to its inflation and growth outlooks on Thursday.

The Bank could raise the repo rate — the rate at which it lends to commercial banks — by 25 basis points to 6.5%, according to a median consensus forecast from a survey of thirteen economists.

If this happened, it would take the prime interest rate — the rate commercial banks charge consumers for loans — to 10% from the current 9.75%. Of the 13 economists surveyed, six forecast rates to rise by 25 basis points, six saw rates being hiked by 50 basis points, while one projected unchanged rates.

Notwithstanding abject rand weakness and inflationary concerns, a hike of 25 basis points is the most that a fragile economy can afford, Credit Guarantee Insurance senior economist Luke Doig said. "We are concerned that hiking rates more now will lead to higher payment defaults, something which we believe is set to spike in the first quarter."

The rand has weakened sharply since the last MPC meeting in November, leading to expectations that inflation will be worse than forecast, necessitating more interest rate hikes. Rates were lifted by a cumulative 50 basis points last year.

Inflation has been on the increase on higher food and household services costs.

Despite the Bank’s repeated comments that it does not target the level of the rand, Lefika Securities economist Colen Garrow believes policy action thus far has become more rand-dependent than data-dependent. His statement may be supported by the fact that the Bank raised rates by 25 basis points in November despite data indicating that economic growth was weak.

A rate hike attracts investors as it means a higher rate of return on investment. If more investors buy local assets, capital flows into SA and the rand strengthens.

The Bank "recognises the importance of capital to fund the burgeoning deficit on the current account of the balance of payments", Mr Garrow said.

Producer inflation is due from Statistics SA on Thursday. Credit extension will be released by the Bank on Friday and the South African Revenue Service publishes trade data on the same day. Producer inflation is expected to have increased to about 5% year-on-year last month from the one-year high of 4.3% year-on-year in November on rising food and input costs.

Credit extension is forecast to have increased about 10% year on year last year after increasing by 9.5% year-on-year in November.

The increase will, however, be driven more by lower base effects — or a lower credit extension figure — created in December 2014 than an actual increase in spending, according to Investec economist Kamilla Kaplan.

The trade balance is projected to have recorded a surplus last month of about R5bn after a R1.8bn surplus in November. There are normally fewer imports in December as most firms are closed for the holidays. This, coupled with some growth in exports, may have supported the expected surplus on the trade balance.