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Sarb expected to keep rates on hold

Jul 18 2013 11:01 Reuters
Sarb governor Gill Marcus. (AFP)

Reserve Bank governor Gill Marcus. (AFP)

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Johannesburg - The South African Reserve Bank (Sarb) is likely to keep lending rates at current four-decade lows well into next year, as it balances inflation risks from a weaker currency against sluggish economic growth.

Central banks across emerging markets are fighting to avert an exodus of foreign capital driven by the impending turn in US monetary policy, with Turkey acting this week to pull the lira off record lows.

Some financial markets are now signalling a rate rise in South Africa is possible, but all 22 economists surveyed by Reuters expect the Sarb to keep the benchmark repo rate at 5.0% at the monetary policy committee (MPC) meeting.

The majority see rates unchanged for the rest of this year, with only one analyst holding out for a 50 basis-point increase to 5.5% in the fourth quarter.

Although growth remains anaemic by its standards at below 3%, the Sarb has not adjusted the repo rate since a 50 basis-point cut a year ago. Its hands are tied by a sharp fall in the rand, which has pushed import costs higher.

The rand has fallen nearly 20% against the dollar since the beginning of 2013, partly as investors balk at incessant strikes at mines which have slashed output in the world's largest platinum producer.

"Even though the economy is underperforming, the central bank doesn't have the flexibility to cut rates further as inflation is out of comfort levels," said Katrina Ell, an economist at Moody's Analytics in Sidney.

Headline consumer inflation slowed more than expected to 5.6% in May but the central bank expects it to trend higher, breaching the upper end of a 3% to 6% target band in the third quarter.

Governor Gill Marcus dampened hopes of an interest rate cut last month, warning that the weakness in the rand had limited the scope to loosen monetary policy.

But a fortnight ago, Marcus was equally lukewarm on the notion of higher rates, telling a business lunch that "the downside risks to the growth outlook would suggest that we should tolerate inflation at these levels".

The consensus among economic analysts polled this week is that the Reserve Bank will keep rates on hold at least until the second half of next year while it assesses inflation trends and growth prospects.

South Africa's debt market has priced out a rate cut next week, while the short-term interest rate market is pricing in more than a 50% chance of a hike. A 50 basis-point increase is seen by early 2014.

"We believe the market is wrong to price in the risk of imminent rate tightening," said Razia Khan, head of Africa research at Standard Chartered in London.

"Should the growth outlook weaken further or the rand stabilise, improving the inflation outlook, then the risk of a rate cut is likely to increase," she added, noting that at least one member of the MPC argued for lower rates at the May meeting.

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sarb  |  mpc  |  gill marcus  |  interest rates  |  sa economy


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