Reserve Bank likely to keep repo rate steady

South Africa’s central bank is likely to leave interest rates unchanged at its policy meeting next week, as concerns about the ailing economy abate and inflation hangs above the top end of the bank’s target band.

The Reserve Bank has slashed rates by 500 basis points since December last year, mainly to ease pressure on the economy, which fell into its first recession since 1992 at the start of this year as a sharp fall in global and local demand hit the key manufacturing and mining sectors.

The cuts have reversed five percentage points of increases in the two years to June 2008 aimed at taming consumer inflation, which has clung above the top end of the bank’s 3% to 6% target band since early 2007.

Eighteen of 25 economists polled by Reuters since Monday expect the South African Reserve Bank’s monetary policy committee (MPC) to leave the repo rate steady at 7%, amid signs the economy could be slowly climbing out of recession.

Seven, or just below a third, predicted a 50 basis point cut to 6,5%.

The survey showed that 16 analysts believed the 50 basis point cut effected last month may well have been the last for the year.

“While the economy remains weak, with a contraction in full year growth almost certain, tentative signs that the worst may now be over in mining and manufacturing may be sufficient to prompt a more cautious stance from the Reserve Bank,” said Razia Khan, Africa head of research at Standard Chartered bank in London.

“Ultimately, a more robust recovery in consumption is required, but the belief may be that this will feed through in time, as lending standards are relaxed and credit growth gets under way,” she added.

Electricity, wages risk to inflation
On Thursday central bank Governor Tito Mboweni said in a speech at the bank’s annual general meeting that consumer inflation should continue moderating but the pace of decline may be limited by high power price increases and wage settlements.

The MPC starts a two-day policy meeting on Monday, and Mboweni will announce the decision the following day.

Some analysts, however, said the central bank could surprise the market with a cut next week, as food price pressures, which have keep inflation sticky on the upside, start ebbing.

“I think inflation is pretty much taking care of itself and over the next couple of months we’re probably going to find inflation in the target range, and not by Q2 next year as the Reserve Bank anticipates,” said Colen Garrow, an economist at financial services group Brait.

“We are starting to see food inflation at the consumer level now starting to trend a little more aggressively [lower]. It’s one of the biggest components on the inflation basket and I think it’s going to drag inflation down.”

A strong rand, which has rallied almost 30% to the dollar and about 20% against the euro this year, will help to further tame inflation.

The central bank could also use a rate cut to try dim the carry trade lure that has pushed it to multi-month highs, invoking repeated warnings from the bank.

However, it has slipped more than 2% since Mboweni repeated on Thursday that its gains were overdone and that “our people” would look at the situation in the coming weeks, raising speculation about next week’s rates meeting.

Garrow was among only two doves in the poll who believe the central bank might follow a 50 basis point reduction in rates next week with another one of the same magnitude in October, which would see rates end the year at 6%.

None of the economists saw any cuts at the central bank’s last two policy meetings for the year, in November and December.—Reuters



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