Share

Sarb should give stern warning - economist

Cape Town - The SA Reserve Bank (Sarb) should bide its time and leave its repo rate unchanged at the conclusion of its Monetary Policy Committee meeting on Thursday, according to Sanlam Investments economist Arthur Kamp.

Merely a stern warning that it stands ready if unfolding events and incoming data warrant action should suffice for now, in Kamp's view.    

"All in all, a combination of slowing inflation (and lower inflation forecasts), soft private sector credit extension and weak domestic demand growth should be sufficient to convince the Reserve Bank that this is not the time to hike its repo rate," said Kamp.
 
"The inflation outlook – at least for the next 12 months – has improved materially. Given the sharp fall in oil prices, inflation forecasts are being revised lower."

On current information he said it is fair to argue that the annual advance in inflation peaked in mid-2014 and should slow into next year – possibly to 5% or lower by the second quarter of 2015, from 5.9% in October 2014.

"Core inflation is relatively sticky, but it’s not expected to drift much higher. Feed-through effects from currency weakness have been modest compared to previous episodes of rand weakness," said Kamp.

"In any event, on a trade weighted basis, the rand has been relatively stable since January 2014. Also, headline inflation and not core inflation drives inflation expectations in South Africa."

Rates won't change - Schüssler
 
Founder of www.economists.co.za Mike Schüssler said the Reserve Bank would not change the repo rate.

Listen:



Schüssler told Fin24 on Thursday that there would be lower inflation going forward because of the big fall in commodity prices. "That's a very good time for all of us," he said.

He said people would be watching new SARB governor Lesetja Kganyago's style more than for any major announcement. "This is his first announcement, so people will be watching the language and the style very, very closely," he said. "People will want to see what our new governor does, what he sounds like, what he seems to be pushing as priorities."

Rate of return on capital is too low - Kamp

In his view there is not much to fear on the inflation front from domestic final demand growth, which remains "palpably weak".

"The rate of return on capital is too low to encourage private businesses to increase their investment spend or employment creation. Amid a dearth of employment opportunities, household income growth is constrained," said Kamp.
 
"At the same time, the expansion in private sector credit extension has been the weakest on record during the upswing phase of a business cycle since at least the 1970s. Households have been deleveraging."
 
It is clear to him from the mini budget in October that Finance Minister Nhlanhla Nene intends pulling in the reins.

"Apart from cutting planned expenditure in the years ahead, policy action may include tax rate increases in the new fiscal year. This is helpful for Sarb," he said.
 
One concern among market participants and economists is that expected hikes by the US Federal Reserve, probably sometime in 2015, may lead to renewed rand weakness amid waning liquidity.

"By extension, this demands the ‘normalisation’ of South Africa’s policy rate. Admittedly, Sarb’s inflation-adjusted repo rate is very low. Actually, it is negative (just)," said Kamp.

"However, the expected slowdown in inflation implies a shift to a positive real repo rate, even if Sarb remains on hold. Moreover, while US inflation remains low and the strength and/or sustainability of the economic upswing remains open to question, the US Federal Reserve can be expected to proceed with caution."

Sarb under pressure

According to Mabyanine Phiri, portfolio associate at ACM Gold, Kganyago and his team are under pressure to keep rates unchanged due to a weaker rand, global policy divergence and inflationary pressure.

"With inflation still in the higher end of the target band at 5.9% and the rand still trading above R10.90 to the dollar, the general market consensus is that rates will be kept unchanged when the decision is announced later on today," said Phiri.

Dr Andrew Golding, CEO of the Pam Golding Property Group, also expects Sarb to keep rates unchanged on Thursday.

"Unless the rand suffers a renewed bout of depreciation, the easing of local price pressures will allow Sarb to ensure that further interest rate hikes are gradual and modest," he said.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.00
-0.3%
Rand - Pound
24.09
+0.1%
Rand - Euro
20.61
-0.1%
Rand - Aus dollar
12.37
+0.5%
Rand - Yen
0.13
+0.6%
Platinum
901.37
-0.1%
Palladium
1,000.53
-0.6%
Gold
2,152.85
-0.4%
Silver
24.92
-0.5%
Brent Crude
86.89
+1.8%
Top 40
65,894
-0.5%
All Share
72,109
-0.4%
Resource 10
53,286
-0.1%
Industrial 25
99,471
-1.0%
Financial 15
16,619
-0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders