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The Reserve Bank left its repo rate unchanged at the conclusion of today’s Monetary Policy Committee Meeting. Looking ahead, the outlook for interest rates seems fairly closely tied with prospects for the currency. SA is falling short on productivity growth in the current business cycle upswing. Given inflexible products and labour markets, a weaker rand raises the risk of higher inflation outcomes than desired. Accordingly, the SA Reserve Bank increased its policy rate earlier this year in January 2014.

There is still much speculation on how much further the Bank is likely to go. We cannot predict the future. All we can say about the Rand is that we believe it is cheap. That does not mean that the currency cannot fall further in the near term. We simply do not know, given the vagaries of global capital flows. And, that leaves the outlook for interest rates uncertain.

Still, one-off interest rate hiking cycles are relatively rare and real short-term interest rates are at low levels. This implies further interest rate hikes are likely at some point. That said, we continue to argue that we are likely to remain in a relatively low real interest rate environment for an extended period. If so, this could be a fairly modest upward interest rate cycle.

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