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SA's repo rate seen steady at 5.5%
All 25 economist polled by Reuters expected the South African Reserve Bank’s Monetary Policy Committee to keep its repo rate unchanged at 5.5% next Thursday.
The overwhelming view was that the next adjustment in rates will be upwards but analysts were divided on the timing. Twelve said rates will start rising only next year while ten saw rates starting to increase in the latter part of the year.
Two analyst still saw a small chance of another rate cut before year end to 5.0%.
The central bank left rates unchanged in 2011, after reducing them by a cumulative 650 basis points in the two years to November 2010.
It now has to strike a balance between rising inflation and sluggish growth.
In November, Governor Gill Marcus said there was a risk of stagflation mainly due to contagion effects of the debt crisis in the eurozone - South Africa’s largest trading bloc.
Inflation in Africa’s largest economy hit a 20 month high of 6.1% year-on-year in November and the central bank expects it to stay outside its 3% - 6% target band for most of 2012.
So far, the main drivers of inflation have been food and administered prices such as electricity and fuel costs, over which tighter monetary policy would have no impact.
Demand has slowly been gaining momentum but not enough to exert pressure on inflation. Latest retail sales data - the main gauge of consumer demand - showed growth in sales slowed in October on an annual basis.
Manufacturing sluggish
The production side of the economy is also not roaring ahead. While manufacturing production growth was higher than expected in November at 2.6% year-on-year, output levels are still far below those before the recession in 2009.
As such, analysts and government have cut their GDP growth forecasts.
The Reserve Bank’s GDP forecasts of 3.0% and 3.2% for 2011 and 2012 respectively is a fraction of the 7.0% the government has said is needed to make a dent on unemployment.
The Reserve Bank has said while its primary forecast will remain on inflation it will be sensitive to growth concerns.
In that backdrop, rates are set to stay at 30-year lows for longer, and the dilemma for the MPC will be when it can start to safely tighten policy without strangling a fragile recovery.
Since next week’s rate decision is almost a foregone conclusion, the market’s focus will be on the MPC statement.
Will the Sarb cut its GDP expectations and by how much? Does it see inflation peaking at higher levels and staying outside the target band for even longer than previous forecasts?
Should the MPC strike a very bearish tone on growth this will increase expectations of another rate cut.
In that case, bonds are likely to rally, pushing yields lower and rates on the money market would also fall.
The rand has been mainly driven by European developments but could see a short-term sell-off in that case.
If the MPC’s inflation forecasts deteriorate further, the market is likely to move its tightening expectations forward and bonds could weaken.
Source - News24
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