Analysts expect SA Reserve Bank to keep repo rate unchanged

Market consensus is that the SA Reserve Bank’s Monetary Policy Committee will keep the repo rate on hold, when SARB Governor Lesetja Kganyago makes his announcement on Thursday afternoon.

The repo rate, which is currently at 6.5%, is the benchmark interest rate at which the central bank lends money to other banks. Changes in the repo rate affect the prime lending rate, which is the lowest rate at which banks start lending to clients. 

Following the release of June’s consumer inflation figure of 4.6% - which came in slightly lower than the market expectation of 4.8% - Investec economist Lara Hodes said that the MPC would likely not change the repo rate. "June’s CPI reading should not spark undue hawkishness from the SARB’s MPC committee," she said.

FNB senior economic analyst Jason Muscat pointed out, in a report on the latest inflation figures, that inflationary pressures were driven by the currency and transport costs, which are sensitive to the oil price. He said that raising interest rates would not contain inflation, but rather add pressure to economic growth.

"We expect the SARB’s MPC to keep rates unchanged at [Thursday's] interest rate announcement, and the decision could quite well be unanimous. Our view is for rates to remain flat until the second half of 2019," said Muscat.

Maura Feddersen, economist at PwC Strategy&, said in a report on the interest rate outlook that the MPC would be focusing on the rand’s exchange rate and the lower than expected economic growth. 

"A weaker exchange rate poses a key risk to the local inflation outlook, as it drives up the prices of South Africa’s imports," Feddersen said. Fuel prices are particularly vulnerable as they are the highest valued group in SA’s import basket.

"The weaker exchange rate not only poses a risk for imported inflation, but also suggests a greater risk of early monetary policy tightening," Feddersen explained. The chance of monetary policy tightening, or an interest rate hike, would be cleared up once the MPC identifies possible new risks to the inflation outlook.

Feddersen noted that inflation seems to be settled in the Reserve Bank’s 3% to 6% target band.

"Looking ahead, the SARB expects inflation to average 4.9% in 2018 and 5.2% in both 2019 and 2020.

"The moderation in consumer price inflation provides some relief for consumers, who benefit from greater purchasing power in an otherwise difficult economic environment," she said.

However, given global trade tensions, stronger oil prices and tighter global monetary conditions resulting in a weaker rand exchange rate, the SARB will "keep its guard up" at the next decision, Feddersen explained.

Slow hiking cycle possible

Sanisha Packirisamy, Momentum Investments economist, said it may be early for the Reserve Bank to hike interest rates. But a slow hiking cycle is expected to start in 2019.

This will be in the interest of maintaining attractive real interest rates, she said.

Packirisamy also expects inflation to remain within the target band for the medium term.

"Further sustained rand weakness and higher international oil prices present the largest upside threats to the inflation trajectory, while higher-than-expected rainfall and healthy stock levels should keep a lid on food inflation," she said.

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