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Is another rates hike on the cards?
Is another rates hike on the cards?

Is another rates hike on the cards?

ECONOMIC NEWS - Aug 23rd 2016, 09:50

THE Reserve Bank could raise interest rates one more time by 25 basis points before the end of 2016 should "a damaging reversal of capital flows especially in the context of Fed tightening" occur, says economic research company Capital Economics, which has a presence in several countries globally. 

Speculation is growing that the US Federal Reserve (Fed) may raise rates before the end of 2016. Another rate hike in the US would see emerging-market currencies such as the rand weaken. Rand weakness causes a deterioration in the inflation outlook thus supporting a rate hike.

Capital Economics, in a research note released on Monday, forecast rates would remain on hold for the rest of 2017, followed by 25 basis points cut in 2018.

Previous rand weakness and the fading effect of lower oil prices would keep inflation above the 3%-6% target band for the remainder of 2016, the economists said. Their expectations are in line with the Reserve Bank’s, which is for inflation to only return to the band in the third quarter of 2017.

Statistics SA will release consumer inflation data on Wednesday. Inflation is expected to have eased slightly, but to have remained outside the target band at 6.1% year on year in July from 6.3% in June according to a median consensus forecast from a BDlive survey of 12 economists.

The team sees the rand, currently at levels of around R13.50/$ ending the year at around R13/$ but weaken to levels of around R14/$ by the end of 2017.

Like the Reserve Bank, the economics research company sees the economy not growing at all in 2016 weighed down by high inflation, tight monetary and fiscal policy, and weak mining output. It forecasts an improvement to 1% and 1.3% growth in 2017 and 2018 respectively.

"With growth now stuck below 2%, we expect essentially no progress in addressing the country’s significant unemployment problems," the economists said.

SA’s growth and development framework, the National Development Plan, envisages economic growth of over 5% per annum as the ideal growth rate that will significantly reduce poverty and unemployment.

The country’s large current account deficit was also a concern, Capital Economics said. While the trade deficit – which partly makes up the current account – was narrowing, the other component, the income account deficit, would likely remain wide, it said. The current account deficit is one of the factors that has played a role in the weakening of the rand.

The research company said SA’s external fragility was worrying given the country’s increasingly unpredictable political situation. The poor performance of the ANC in local elections had raised the prospect of a struggle for power within the ruling party, they said.From DFM Publishers (Pty) Ltd 

Read more about: south africa | finance | economy

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