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Sun May 29 04:02:37 SAST 2016

Economists expect total of 100bps in interest rate hikes in 2016

TMG Digital | 24 January, 2016 14:22
Rands notes. File photo.
Image by: Gallo Images / Foto24 / Brendan Croft

FNB economists are expecting a total of 100 basis points in interest rate hikes in 2016.

They expect the South African Reserve Bank’s Monetary Policy Committee (MPC) to hike by 25bps at the conclusion of its first meeting of the year on Thursday.

“The recent Rand weakness along with rapidly rising maize prices has raised the risk that inflation will move above the SARB’s 3% - 6% target for the majority of 2016. As a result we expect the SARB to hike the repo rate by 25bps‚” FNB Economists‚ Alex Smith and Mamello Matikinca said in their weekly review. They added there was a possibility that given the inflation concerns‚ the SARB might look to hike by 50bps instead.

“However‚ we think that the current economic weakness will encourage the SARB to take a more measured approach.”

The FNB economists pointed out that looking ahead the inflation outlook was likely to be affected by a number of countervailing forces.

“Downside risks emanate from the possibility that oil prices remain at current low levels as our forecast assumes a consistent increase in oil prices from current levels. Upside risks could come from a further depreciation of the Rand exchange rate or additional increases in maize prices from current levels.

“A secondary upside risk is posed by the possibility that the weak pass through from previous currency weakness into inflation becomes more pronounced.

“At this stage we believe that the low pass through is due to weak demand and a very competitive pricing environment‚” the economists stated.

“Our core forecast is for inflation to gradually increase over the coming months and to average 6.1% in 2016. The fact that inflation is expected to breach the SARB’s target band of 3% - 6% for a full year in the second half of 2016 and first half of 2017 leads us to believe that there will be 100bps of interest rate hikes in 2016‚” they added.

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