Why Sarb might leave repo rates alone

Cape Town – A slowdown in August’s inflation figures could be exactly what the doctor ordered, as the SA Reserve Bank’s Monetary Policy Committee (MPC) announces its repo rates decision on Wednesday.

Statistics SA will release its August Consumer Price Index (CPI) figures at 11:00 on Wednesday, ahead of the afternoon repo rate announcement, but Fin24 can reveal that the CPI looks set to remain unchanged month-on-month (m/m).

The Inflation Factory, which measures CPI in real time, said the m/m inflation at the end of August was 0%, implying a year-on-year (y/y) inflation of 4.6%.

“This is the first monthly decrease in y/y inflation following five months of increases and strengthens the argument for the MPC to leave rates unchanged,” said The Inflation Factory.

“Simple projections of CPI show the y/y rate continuing to increase through to January 2016, with a strong chance of breaching the 6% ceiling by the first quarter of 2016.”

SA is battling slow economic growth, with a Gross Domestic Production (GDP) contraction of 1.3% in the second quarter of 2015. It has been ascribed to the country’s lack of electricity capacity as well as tough conditions in the emerging markets and commodities sector.

In July, the MPC hiked the repo rate by 25 basis points to 6% per annum. Sarb governor Lesetja Kganyago said at the time that he was concerned about the “outlook for economic growth that is constrained by severe electricity shortages, low levels of consumer and business confidence, inflationary pressures and the possibility of rising interest rates in the United States”.

Investors have scaled back bets that the SA Reserve Bank will raise borrowing costs on Wednesday after the Federal Reserve delayed its rates liftoff and as inflation expectations ease, reports Bloomberg.

“The Fed has given us room to breathe,” George Herman, head of South African investments at Cape Town-based Citadel Investment Services, said by phone on Tuesday. “South Africa’s inflation profile has also improved over the last few weeks due to lower energy prices.”

The monetary policy committee cited risks that price growth will exceed the upper end of its target range because of the weaker rand when it raised borrowing costs for the first time in a year in July. The Reserve Bank seeks to maintain inflation between 3% and 6%.

FULL STORY: D-day for SA rates decision