Cape Town - The South African Reserve Bank's (Sarb's) monetary policy committee (MPC) is set make its much-anticipated interest rate announcement as the rand battles amid economic and political instability.
Economists and traders are divided on what Sarb governor Lesetja Kganyago will announce on Thursday afternoon.
The repo rate, which is the rate at which Sarb lends money to commercial banks, has been increased by 1 percentage point since July 2015 to 6.75%.
Brian Kantor, chief strategist and economist at Investec Wealth and Investment, has raised concerns around the potential for stagflation in the economy, which gives rise to a slow growth, high inflation environment.
In an analysis for BizNews on Wednesday, Kantor said that rather than fighting inflation with higher interest rates, South African monetary policy should focus on limiting the damage higher interest rates have caused to the economy. This would bring the MPC to the realisation that they will not influence the outlook for inflation.
Among 30 analysts surveyed by Bloomberg, 16 predict the MPC will keep the benchmark rate unchanged at 6.75% while the rest expect a 25 basis-point increase.
Overberg Asset Managers said the forward rate agreement market is attributing an 80% probability of a 25 basis-point rate hike.
"Inflation risks are rising: consumer price inflation breached the Sarb’s 3-6% inflation target in January and producer price inflation surged from 4.1% to 7.6%, indicative of a broad-based increase in production costs.
"Despite the fact that economic growth is hamstrung by shrinking mining and manufacturing output, which fell in January by -4.9% and -1.8% respectively, and lacklustre household expenditure, the Sarb will likely hike the key repo rate by a further 25 basis points from 6.75% to 7.0%.
"Although the Sarb’s actions will have little effect on the rand exchange rate or drought-induced food price increases, it believes that rate increases will prevent rising inflation expectations from becoming entrenched," Overberg said.
Political turmoil is worsening in South Africa, undermining investor confidence in the country and hitting everything from the rand to interest rate bets.
According to a Bloomberg report, the currency and bond yields have fluctuated sharply this week as Finance Minister Pravin Gordhan called the police’s questioning of him “harassment” and revelations emerged of cronyism in President Jacob Zuma’s administration.
"After gradually gaining ground in March, the rand weakened 2.6% against the dollar on March 15 after the Hawks said they will force Gordhan to cooperate with their investigation of the tax agency, which he had led before 2009," the report said.
A day later, the rand reversed losses after Deputy Finance Minister Mcebisi Jonas said he was offered the finance minister’s post by Zuma’s friends the Guptas, allegations that may undermine the president’s power.