Investec expects interest rate hike

Analyst Peter Kent believes Sarb Governor Gill Marcus will increase interest rates on Wednesday.

Reserve Bank Governor Gill Marcus will announce whether interest rates will change or not on Wednesday 27 January. Picture: Supplied.

JOHANNESBURG - The South African Reserve Bank this week will announce its Monetary Policy Committee's first interest rates decision of 2014.

Most analysts expect Governor Gill Marcus to keep rates on hold.

The central bank hasn't changed the rate since July 2012, when it brought it down to five percent - a 40-year low.

Amid major concerns over the weakening rand and with an ongoing strike in the platinum sector, Marcus will have the unenviable task of making the announcement on Wednesday afternoon.

An analysis by Reuters shows many expect the rate to remain unchanged.

But Investec Asset Management's Peter Kent says the company is largely convinced that a hike would be positive, and says they are 80 percent sure it will happen.

Other analysts are putting the odds of a change at 40 percent.

Kent concedes that the decision to hike the rate would be a controversial one, making money more expensive for consumers and likely decreasing consumption overall.

"We're not arguing that it's a nice outcome, but unfortunately South Africa faces some tough choices at the moment," he argues.

"Our economy is out of kilter, we're spending beyond our means and we're importing more than we export. As a result of that, our currency's under considerable pressure. It's completely altered the inflation outlook."

Kent says this argument may seem to ignore the fact that consumers aren't spending and many people are struggling.

He says if Sarb doesn't make the move, things will only get worse.

"The central bank needs to make a tough choice, address this and raise rates. It's certainly going to be painful but we think the alternatives of dithering and not being precise at this point could potentially be a lot more costly."

Kent says applying the pain now would buy the country credibility in the global market and that would benefit the economy in the longer term.

"What we're saying is, just get ahead of the curve and bring policy back into control. The bond market [will] continue to fund our government, the government can then continue with infrastructure expenditure and superfluous expenditure gets eliminated. The pain over the long-term disappears and leaves our economy a lot stronger."

Kent says inflation has remained within target with the rand below 11 to the US dollar, but with the exchange rate now "comfortably north" of that, inflation could easily rise sharply in the coming months if the Sarb doesn't prepare itself and take the hit now.

He says by raising interest rates now, the Sarb would be taking control of policy and avoid being forced into unappealing decisions at a later stage.

"Hopefully, the little bit of medicine means we don't have to have an operation later."

To listen to Kent's full interview with 567 CapeTalk/Talk Radio 702's Bruce Whitfield, click here.