Fin24

Repo rate seen steady at 5.5%

2012-07-16 08:58

Johannesburg - The Reserve Bank is likely to keep interest rates at 30-year lows at next week’s policy meeting as economic growth remains below potential, while inflation is expected to stay on target over the next couple of years.

Of the 23 economists polled by Reuters this week, 21 expected the South African Reserve Bank's (Sarb's) monetary policy committee to keep the repo rate at which it lends to commercial banks at 5.5% next Thursday, with only two seeing a 50 basis-point cut.

Sarb has kept rates at three-decade lows since late 2010, but some analysts believe further stimulus is needed as a global downturn hurts exports while inflation is anchored within a 3%-6%  target range.

The consumer price index (CPI) is likely to have slowed further to 5.6% year-on-year in June, continuing the previous month’s downward trend, a separate survey showed on Friday.

At its previous meeting in May, the central bank said inflation had likely peaked in the first quarter of this year, and should remain with the target band until the end of 2014.

Economic growth remained below potential, it said, cutting its forecast for this year to 2.9% in 2012 compared to previous expectations of 3%, although this is still above the Treasury’s forecast of 2.7%.

"The likelihood of further easing depends mostly on the Sarb’s assessment of the growth outlook and risks," said Renaissance Capital economist Elna Moolman.

"The money market is pricing in rate cuts before the end of the year - it seems to expect this at the September meeting rather than the July one - but this is not (yet) the consensus among economists."

South African government bonds have rallied sharply in recent weeks, with benchmark yields pushing to historic lows as the debt market sees a 50/50 chance of rates coming down in September or November, the last two policy meetings for the year.

In the poll, seven economists said a 50 basis-point cut was in the offing before year-end to spur growth, but 16 saw the bank maintaining its cautious "no change" stance for the rest of the year.

The next move in rates, most probably a 50 basis-point increase, is likely to come towards the end of 2013 or early in 2014 when inflation should start trending higher.

The Reserve Bank warned in its annual report last week that the main upside risk to inflation lay in the depreciation of the rand, which hit a three-year low of R8.71 against the dollar last month and remains vulnerable to risk aversion over the eurozone debt crisis.

“Given that eurozone heads have yet to offer a long-term credible solution to the crisis, our rand forecast is for a longer period of volatility and extended weakness on the 12-month horizon, and such a scenario would indeed pose a risk to inflation,” said Anisha Arora, emerging market analyst at 4CAST.