Johannesburg — LOCAL markets are betting that interest rates will start to rise in the second half of next year.

They are putting a 50% probability on the likelihood that the Reserve Bank will raise lending rates by half a percentage point in the third quarter, which would take its repo rate back up to 7,5%.

Some analysts share that view. But others think the odds of a rate hike before the end of next year are slim, and a few are even predicting more interest rate reductions.

In theory, it depends largely on what happens to inflation in the months ahead. The annual rise in consumer prices dipped back inside the 3%-6% official target range for two months in a row during October and last month, after being higher than that for two-and-a-half years.

That trend may be short-lived, with the Bank and many analysts predicting a "sustainable" return to the target range only in the second quarter of next year.

Afterwards, the inflation outlook is a little ominous, as households and business wait to find out if the National Energy Regulator of SA (Nersa) will grant power utility Eskom its requested tariff hike of 35% over each of the next three years.

But even if the request is granted when Nersa makes its decision known in February, and inflation does start to edge up again later in the year, the Reserve Bank is unlikely to be too hasty about tightening monetary policy.

The domestic economy may have emerged from recession in the third quarter of this year, but the outlook is far from buoyant. Jobs were still being shed at an alarming rate during that period, and even if that slows, the chances of a strong pick-up in employment in the months ahead are slim.

Consumer demand is still retreating, and that is the economy's main growth engine. It is unlikely to rebound strongly while job security remains a worry, disposable incomes shrink and household debt burdens are so heavy. Official data have shown that credit demand from households and companies fell for the first time in 43 years during October, and there is likely to have been an even sharper fall last month.

To make matters worse, the economy's other big growth engine - investment - fell at its sharpest pace in more than a decade in the third quarter.

So within SA itself, things are looking up, but are not exactly bright. Not yet, anyway.

Add to that a tentative global recovery, and the implications for local shares and exports are rather gloomy.

Government finances are also under huge pressure. That will make it harder for the authorities to carry on with their ambitious spending programme, both to help the poor and to improve some of SA's stretched infrastructure.

The Bank has made clear it is as concerned about the economy as inflation, and in such an environment near-term rate hikes appear most unlikely.