The Reserve Bank of South Africa could raise interest rates 25 basis points next month after the US Federal Reserve on Wednesday left the door open for a possible hike in the US in December, economists say.
But credit extension figures out on Thursday show that spending in the economy is weak, coupled with other weak economic indicators, could cause the bank to pause, BDLive reported Saturday.
Bank deputy governor Daniel Mminele cautioned about rand weakness at a symposium. “Actual US policy normalization could result in further weakness in the rand against the dollar, and could also negatively impact portfolio flows by reducing the willingness of fund managers -- a large share of them having US dollar liabilities -- to hold ... South African bonds and equities.”
A US rate hike will cause dollar strength and capital flight from emerging markets such as SA, which will cause the rand to weaken. A weaker rand stokes inflation --which is what the bank is more concerned about -- and may lead to another rate increase.
The possible implications of higher rates in the US and around the world for financial stability and resilience, and for domestic price developments meant that central banks, including the reserve bank, would have to “exert continued and utmost vigilance”, Mminele said.
A rate hike next month may damp festive season spending.
Meanwhile, rating agency Moody’s said on Friday that most South Africans will still be able to meet their monthly home loan repayments even if interest rates rise further and weak economic growth continues.
Moody’s expected additional interest rate increases over the next 12 to 18 months as the Reserve Bank sought to curb inflationary pressures.
Weak economic growth, high unemployment, low savings, and rising interest rates would restrain credit growth and negatively affect borrowers’ repayment capacity although not to critical levels, the agency said.
“Interest-rate hikes are likely to follow in SA after the three increases since 2014, but these will not significantly affect the affordability of mortgage loans borrowers,” Moody’s analysts said in a report.
Rates were raised by 50 basis points in January and by 25 basis points in July last year. They were hiked again by 25 basis points in July this year.
The fact that interest rates were already low when they started being raised, very low levels of debt to income, and stronger credit risk profiles of home owners, were among factors that boosted affordability, Moody’s noted.
“Seasoned borrowers will also demonstrate resilience in the face of expected subdued economic growth,” the rating agency said.
