Economists predict Reserve Bank to hold repo rate

After much hype last week, the United States Federal Reserve did not raise interest rates, which suggests that the South African Reserve Bank will hold off hiking local rates at home, according to economists.

The US Federal Reserve decided on Thursday to stay its hand, after initial hints that September would be the month it would finally increase interest rates for the first time since 2006.

Since the financial crisis, many major central banks around the globe have kept interest rates at all time lows, in a period of unprecedented loose monetary policy, to help their economies recover. 

Holding firm
But on Thursday the Federal Reserve said in a statement that global economic and financial developments may restrain economic activity, justifying it holding rates. 

A global commodities slump as well as a collapse in Chinese stocks has overshadowed world markets in recent months.

Economists believe that the move has given the South African Reserve Bank (SARB) and its governor Lesetja Kganyago room to hold the local repo rate at 6%. 

The SARB’s monetary policy committee (MPC) will make its announcement on interest rates on Wednesday. 

In July, it lifted rates slightly from 5.75%. The decision was somewhat contentious as many fellow commodity-exporting countries such as Australia and Canada were easing monetary policy, to help their economies cope with the plummeting commodity prices. 

Mohammed Nalla head of strategic research at Nedbank Capital said in a research note that “given the US Federal Reserve holding back on a hike at this stage, the SARB would have some scope, considering the earlier SARB hike, to stay on hold for now”.

But he noted that South Africa’s “stagflation dilemma” was likely to worsen. 

South Africa is experiencing inflationary pressure at the same time as poor economic growth  – referred to as stagflation.

“Domestic demand and supply data have continued to deteriorate while exogenous factors will likely continue to push domestic inflation higher into the end of the year, effectively entrenching the stagflation dilemma,” Nalla said. 

Locally food prices are expected to rise sharply due to substantial increases in maize prices following a severe drought this year, while the rand has been extremely volatile in recent months. 

At the same time, the country’s economic growth is expected to continue to disappoint with gross domestic product (GDP) figures for the second quarter of the year revealing that the economy had shrunk by 1.3%.

Appropriate stance
According to Annabel Bishop, group economist at Investec, the Fed’s position was the “appropriate stance” to take “with markets gaining comfort from the assertion that monetary policy accommodation will be appropriate to the weakness experienced following the slowdown in global conditions”.

She said that despite South Africa being a commodity exporter, heavily exposed to global conditions, particularly the commodity declines, the SARB “unfortunately” hiked rate in July before the release of GDP data for the second quarter of 2015.

“We expect no change in the repo rate either at the September MPC meeting, or in the remainder of this year, with the SARB likely revising down its GDP growth outlook this year,” she said.

She added that inflation expectations have been rising as a result of external factors, including amongst others rand weakness, the drought and state administered prices. 

“Interest rate increases will not quell these exogenous pressures,” she said, arguing that under current circumstances a rate cut was actually required. 

“Due to the marked moderation in the economic growth outlook it would serve SA best to cut interest rates. However, flat interest rates in the remainder of the year and most of next is the best to be hoped for,” she said.  

She warned however that globally monetary policy accommodation is widespread, with only South Africa and Brazil bucking the trend. Brazil is trapped in a deepening recession and last week had its credit rating downgraded sparking fears that South Africa may follow suite.

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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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