South Africa’s Reserve Bank is expected to raise interest rates towards the end of this year, sooner than previously forecast and not long after the United States, as the benefits of a lower oil price dissipate, a Reuters poll found.
Higher rates in the U.S. could pull foreign inflows away from South Africa and other emerging markets by making U.S. yields more attractive, weakening the rand and ultimately stoking inflation.
This week’s poll suggests interest rates will be raised 25 basis points to 6.00 percent in the last quarter of this year.
Economists have been wondering if rates might remain low for longer, to boost South Africa’s ailing economy. But encouraging data from the U.S is cementing a case for an increase there, suggesting local rates will also need to rise.
“There was a prospect of some benefit of the oil price in boosting the economy more, but most of that is going to be wiped out by the currency weakness and a slightly higher oil price,” said Kevin Lings, chief economist at Stanlib.
In a poll taken last month, the median suggested the first increase would be in first quarter of next year. Now oil prices are rising and anticipation of higher rates in the U.S. is intensifying, putting the rand under pressure.
The rand fell to a new 13-year low against the dollar this week as emerging market currencies tumbled on heightened expectations of a U.S. rate hike.
A separate Reuters poll suggested emerging market currencies would sink further — to decade or even record lows — as U.S. rates start rising from near-zero.
OIL SLIDE OVER
Another poll at the end of last month suggested oil prices appeared to have touched bottom and should recover somewhat in the second half of this year.
Brent crude oil is expected to average $59 per barrel this year, up from $58.30 seen in a January poll but nowhere near the $110-plus it was trading at in the middle of 2014.
That meant inflation expectations were unchanged from February’s poll at 4.5 percent for this year, within the Reserve Bank’s target range of 3-6 percent.
The median forecast for growth this year was trimmed 0.2 percentage points from last month’s poll to 2.0 percent, below the central bank’s forecasts but in line with the Treasury’s.
“I think overall we are trapped in a two percent type environment,” Lings said.
The majority of economists said South Africa needs to make it a priority to reform labour laws and improve the electricity supply to boost employment in Africa’s most developed economy.
Roughly a quarter of the country’s labour force is jobless.
Many analysts say the government has failed to clamp down on corruption or overhaul stifling labour laws. Those laws led to a wave of strikes that hurt mining output in the last few years, although South Africa appears to be past its worst labour unrest.