“We’ve got no hike in our forecast. Our argument is that our industrial production has actually gone into a recession. If you look at our mining and manufacturing electricity production, they’re all contracting on the month, and indeed they’re also contracting on the quarter, on a three-month rolling average basis, and that is the same metric that GDP growth is calculated on,” Annabel Bishop, chief economist at Investec, told CNBC Africa.
“They’ve done that both for April and May, [and] they’re actually worse than they were in the first quarter.”
Japanese financial firm Nomura International expects a 50 basis point increase, while the International Monetary Fund (IMF) has warned that it is likely to cut South Africa’s growth prospects if strikes issues continue.
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Bishop added that if a country’s industrial production is however moving towards a recession, and if the IMF plans to revise down its growth forecast, there is little need to hike interest rates.
“The worry has been that the rand is depreciating substantially, and historically that does mean that the reserve bank’s inflation model does tick up its Consumer Price Index forecast. That could be where Nomura is coming from,” she explained.
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Bishop however cautioned that the monetary policy transmission mechanism, or the change the interest rate has on inflation, only works on a 12 to 18-month period. There’s very little impact it has in six to 12 months, and none in zero to six months.
“I think the rand would depreciate substantially further because foreigners have been purchasing our equities, and obviously expectations of high interest rates would tend to reverse the view on equity prospects,” said Bishop.
“The purchase of bonds has been very slight in comparison to the equity purchases, and I do not believe that such an interest rate increase would be sufficient to increase appetite on our bonds at this stage.”