Economists warn of SA recession

Analysts say an interest rate hike could tip the local economy into recession.

The South African Reserve Bank board, with Governor Gill Marcus at centre. Picture: Supplied.

JOHANNESBURG - The South African Reserve Bank (Sarb) risks sending the country's economy back into recession if it chooses to raise interest rates, economists said on Tuesday.

Governor Gill Marcus is expected to announce the Monetary Policy Committee (MPC)'s decision on Wednesday afternoon.

It is widely expected the central bank will keep rates at lows of five percent where it has been since July 2012.

But with ongoing industrial action, low growth and inflation edging upwards, economists say a hike might become necessary.

At the same time, other major emerging markets face similar concerns and are leaning towards raising rates.

The rand is also facing further drops against the dollar as the US Federal Reserve is expected to continue tapering its stimulus programme while the American economy sees slow improvements.

These factors, Investec said on Monday, meant the MPC would have to administer a dose of medicine to the local economy in the form of a rates hike.

It says it will prevent the need for a "serious operation" at a later stage.

Speaking to 567 CapeTalk/Talk Radio 702's Bruce Whitfield on Tuesday, Chief Economist at Investment Solutions Chris Hart agreed, saying the tough decision should be made.

"I think it's the right decision in the sense that we are struggling at the moment between growth and inflation."

He says a hike could help offset the problems.

"I think a rates hike could really tip the economy into a recession," warns Hart. "We may need that just to help close some of the deficits we have."

He says the risk of a recession may be outweighed by the risk of doing nothing, in that a temporary slump would hurt less in the long-term than a perpetually stagnating economy.

Asked by how much the Sarb might raise rates, Hart downplayed fears of a major jump.

"I think if they do raise rates, they may do a quarter of a percent to be more symbolic than substantive."

Also speaking to Whitfield on Tuesday, Rand Merchant Bank (RMB) currency strategist John Cairns said he was less sure about the need for a hike at present.

"I would agree with Chris that if they hike rates now it would hurt the consumer, but it could be the right thing to do in terms of solving some of the imbalances in the economy," he says.

"I don't think the Sarb will act," he points out, adding that they don't need to just yet.

Cairns explains that RMB's inflation forecasts show the rise in prices is still somewhat contained and may well level off towards the middle of the year.

However, he admits RMB remains very concerned overall.

"This is a very, very worrying situation and I don't think the media in general or the local financial markets are putting enough emphasis on it.

"If we continue to see rand weakness, the Sarb is going to have to hike rates and we risk a recession domestically with fallouts in all the financial markets. It's the biggest risk we're facing now.

"It's not a South African thing, it is emerging markets in general," adds Cairns.

To listen to the full interviews with Hart and Cairns, click here.