Rate hikes wrong medicine for SA - analyst

Cape Town - The Reserve Bank's current and possible future attempts to curb inflation by hiking the interest rate appear to be the wrong medicine, says an analyst.

In his assessment of how global market turmoil could affect South Africa's economy, Overberg Asset Management director Brett Birkenstock highlights interest rates as the factor most likely to be influenced by the sudden drop in world markets.

"The South African Reserve Bank has tried (and will possibly try again) to rein in inflation by increasing the interest rate. This, however, seems to be the wrong medicine for the ailment as SA's inflation is not really due to a heated economy or too much disposable income," said Birkenstock.

He believes that if the US Federal Reserve increases interest rates, SA is likely to follow in order to keep attracting foreign investors and keep the rand from weakening and controlling inflation. But because of the sudden market drop, many analysts have indicated that the Fed is unlikely to raise interest rates as soon as previously expected.

Turning to the rand, Birkenstock said that although it had dropped like all emerging market and commodity-based currencies, it had in fact fared better than some emerging market currencies - contrary to public opinion in South Africa.

"The rand was weak prior to the market drop and has weakened further due to the risk off approach which is a factor outside the South African political, economic and social environment," said Birkenstock. He believes that in the short term the currency will strengthen if markets recover, while if they drop further, the rand will follow.

Birkenstock believes it is far too early to make any real assessment of the effect of the sudden market drop on global and South African inflation. "Cheap commodity prices lower inflationary pressures, while some of that is lost in SA due to the rand's drop at the same time."

If the rand stays weak or falls further, inflation will go up as South Africa is mostly an import-driven country. Electricity price hikes and other government entity increases such as road levies and petrol tax increases will also not help local inflation, Birkenstock said.

Fin24
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http://www.fin24.com/Economy/Rate-hikes-wrong-medicine-for-SA-analyst-20150827