Sarb to press pause button on rates - analysts

Cape Town – Analysts expect the South African Reserve Bank (Sarb) to keep interest rates unchanged, even though the consumer price index for October was slightly higher than expected at 6.4%. 

Statistics SA released the headline consumer price inflation for October on Wednesday, showing a 0.5% month-on-month increase partly due to higher food prices and transport costs. 

“The latest year-on-year-figure (calculating the change over a 12-month period) was above market expectations of 6.3% year-on-year,” KPMG said in a company note. 

“It was also the ninth reading in 2016 so far to breach the upper limit of the South African Reserve Bank’s  inflation target range of 3%-6%.”

The interest rate announcement by the Reserve Bank’s monetary policy committee (MPC) on Thursday afternoon – the last one for the year – is not expected to contain any shocks. The prime lending rate has been at 10.5% since March, while the repo rate has been at 7%. 

READ: Rates unchanged as Sarb lifts growth forecast - as it happened

Stubbornly low economic growth and high unemployment figures now show signs of abating, putting upward pressure on the rand. 

At its previous MPC committee meeting the Sarb said it expected GDP to grow at 0.4% for 2016, while unemployment for the third quarter of this year climbed to a 13-year high of 27.1%. 

Sarb governor Lesetja Kganyago said in a speech in October that inflation is expected to average 5.8% in 2017, compared to a mean of 6.4% for 2016, and that the interest rate hiking cycle “may be nearing its end”. 

He cautioned however that inflation would first need to be within the 3% to 6% target range before monetary easing will be considered. 

READ: Interest rate cuts still some way off - economists 

Economist Sanisha Packirisamy and Herman van Papendorp, head of asset allocation at Momentum, concurred that interest rate cuts are still some way off, given the risks of inflation due to a volatile rand and above-inflation nominal wage settlements. 

“Core inflation shows signs of underlying inflationary pressures, while inflation expectations by business and labour unions remain elevated – even over a five-year horizon, posing a risk to headline inflation,” Packirisamy and Van Papendorp said. 

Peter Attard Montalto, economist at the Japanese investment bank Nomura, said the latest inflation will figures will be “uncomfortably close to the top end of the band” for the MPC. 

“This will likely drive some of the hawkish rhetoric at the MPC meeting,” Montalto said. 

Deon Kohlmeyer from RMB Global Markets Research said Thursday afternoon’s rating decision should not result in any market movements or bond volatility. 

“What may move the local market somewhat is if there is any deviation from the expected softening in October purchasing price index (PPI) to around 6% from September’s 6.6%,” Kohlmeyer added. 

READ: PPI steady at 6.6%