South Africa’s central bank looks set to keep interest rates steady this week, with latest data suggesting the struggling economy could well be on the mend, although inflation remains a worry.
The monetary policy committee (MPC) began pondering rates on Monday, a short while before official figures showed a smaller-than-expected contraction in retail sales, pointing to an economy clawing its way out of recession.
The South African Reserve Bank has slashed rates by 500 basis points since December last year to help boost growth, unwinding increases during the two years to June 2008 as it grappled with inflation, mainly driven by consumer demand.
But the majority of 25 economists polled by Reuters last week saw the key repo rate unchanged at 7,0% this time as targeted inflation persists above a desired 3% to 6% range.
A separate survey on Friday showed the CPI consumer price inflation gauge, which breached the target band in April 2007, is expected to have remained above it at 6,4% year-on-year in August.
Statistics South Africa will release the August inflation data at 07.00GMT on Tuesday, about six hours before Reserve Bank Governor Tito Mboweni begins his announcement on interest rates at 13.00GMT.
Analysts said Monday’s retail data, which showed a 3,9% fall in sales in the year to July against a revised 6,9% decline in June, reinforced the view that interest rates will be kept unchanged.
”This number points to the economy exiting recession during the third quarter … This data will be important for the South African Reserve Bank given their concentration on consumption,” said Peter Attard Montalto, emerging markets economist at Nomura International.
”We continue to see rates unchanged tomorrow at 7,0% after this number, assuming no big surprises from CPI.”
But some economists see the off-chance of a rate cut on Tuesday, particularly if inflation surprises on the downside due to the favourable base effects from food and fuel prices, and a strong rand currency.
”This disinflationary trend, the appreciation in the exchange rate since the August meeting and still weak economic growth conditions add support to our view that the SARB is likely to squeeze one last 50 basis point cut in,” said Absa Capital in a note. — Reuters