Gordhan and Marcus: Don’t necessarily expect more rate hikes this year

Investors pay close attention to interest rate movements. For good reason. Interest rates reflect the price of money. And this is the key to the way all investment vehicles are priced. High interest rates translate into lower equity and property prices and vice versa. So when there a reversal occurs in the interest rate trend, investors often over-react. As may have happened last week when the SA Reserve Bank raised interest rates by 50 basis points. It was among a number of emerging market central banks which acted after sharp selloffs in their currencies. But SARB Governor Gill Marcus and the country's Finance Minister Pravin Gordhan today reacted smartly to speculation that the rate increase is the first of a series. They told Reuters  (story below) that special circumstances were at work – and urged market participants to not necessarily expect further rate increases this year. – AH 

By Stella Mapenzauswa and Ed Cropley

JOHANNESBURG, Feb 3 (Reuters) – South Africa's Reserve Bank did not make the decision to raise interest rates last week lightly, Reserve Bank Governor Gill Marcus said on Monday, adding market expectations for further hikes this year might be over-done.

Meanwhile, Finance Minister Pravin Gordhan refused to comment directly on the first rate increase in nearly six years, but reiterated that the central bank, while independent, had a broad mandate to consider economic growth in plotting monetary policy.

Government bonds rose to session highs and short-term yields fell steeply after Marcus's comments, made in response to last week's move by forward rate agreements to price in rate hikes of up to 200 basis points by year-end.

The Reserve Bank increased its repo rate by 50 basis points to 5.5 percent, to head off inflation pressures stemming from a weaker rand after a broad sell-off in emerging markets.

Asked if the market might be over-exaggerating the chances of more hikes to match bold tightening measures by emerging market peers such Turkey, Marcus said:

"I would say yes … I would not say it's a foregone conclusion. I'm saying that it is clearly very data dependent, what our next moves are."

"It's not what we would really like to do because in a slowing economy you would want to be giving the opposite, in fact you would want to loosen monetary policy," she told Reuters on the sidelines of a business conference.

But she defended last week's rise in the repo rate as necessary to fulfil the bank's full mandate, which includes keeping inflation within a 3-6 percent band.

The move has raised the ire of the government's labour union allies, further straining relations ahead of elections due in a few months, but Gordhan was more philosophical.

"Their mandate is to apply their minds independently to price stability on the one hand but also to look at growth and employment issues on the other hand," he said in a separate interview.

"They've given their judgment on that matter and the country has to work with it."

Gordhan, a vocal emerging market policymaker, also called for greater coordination between the G20 rich and developing nations to stabilise the world economy, currently typified by heavy selling of emerging market assets and currencies such as the rand.

The currency has lost 6 percent against the dollar this year, on top of nearly 20 percent last year, as global investors have chased improving returns in the likes of the United States.

The prospect of the U.S. Federal Reserve turning off its money taps this year, combined with political troubles in several emerging markets, has helped drive the sell-off and exposed some of the unresolved problems in both developing and advanced economies.

But Gordhan said investors should not forget developing markets.

"Emerging markets are still important sources of global demand and sources of growth and sites of investment," he said.

He also reiterated the government's stated policy of not intervening in markets to influence the exchange rate.

"A flexible exchange rate is the best way to absorb the shocks that we are seeing," he said. "We'll keep an eye on the situation."