Interest rate expectations
The SARB announced on Thursday this week that its repo lending rate will remain unchanged at 3.5%. This was in line with market expectations, although a few analysts are trying to make a case for a rate cut. These expectations stem from the need to provide further relief to the struggling economy, hoping that a rate cut will stimulate business activity and give consumers and businesses with large debt burdens a break. Furthermore, we see solid foreign inflows into the country, and as such, a rate cut should not lead to a weaker currency. In fact, the relatively strong Rand we have seen over the last few weeks may provide a further reason for the Central Bank to lower rates.
If we look at inflation though, there seems to be good reason to leave rates alone for now. South African inflation for April was also announced earlier this week, making a sharp jump from 3.2% in March to 4.4% in April. The main reason for the big increase is a rise in food and transport prices. Food prices increased year-on-year by 6.3% while transport increased by 10.6%. Since the beginning of the COVID-19 pandemic, this is the first time that inflation has come close to the SARB's inflation target of 4.5%.
Remember, the SARB is trying to maneuver inflation within its target rate of between 3% to 6%. With inflation now at 4.4%, it is very close to the midpoint of 4.5%, which means there is little reason for rate changes - especially given that inflation has risen so sharply from one month to the next. We expect that SA inflation will rise further to 5.3% for May and then move down again to 4.7% near the end of the year. With these expectations in mind, the chances are slim that the SARB will announce any rate hikes this year.
The general expectation in the market is that the first-rate increase will only happen early next year with an increase of 0.25% in the first quarter followed by another 0.25% increase in the second or even third quarter. I cannot see that interest rates will rise this year, especially because of the weak credit growth we are currently seeing. In SA, the private sector credit growth shrank by 1.52% for March - this is the first time this has happened in SA since the global financial crisis in 2010. Only if this figure turns positive and, in my opinion, shows double-figure growth will there be enough reason to look at interest rate hikes.
To sum up, investors should accept the fact that interest rates will remain low for longer still and will not rise any time soon. There are several attractive investment options that can provide a decent return on investment for even conservative investors without necessarily taking more risk.
For more information, please contact the Capricorn Private Wealth Service Desk via email at
Service.PrivateWealth@capricorn.com.na or by telephone on (061) 299 1444.
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