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Sarb seen keeping rates at 6.5% next week

As an anticipated quicker rise in consumer prices over the coming months won’t drive inflation above target.

South Africa’s Reserve Bank will keep interest rates unchanged next week as an anticipated quicker rise in consumer prices over the coming months won’t drive inflation above target, a Reuters poll showed Wednesday.

All 25 economists surveyed in the past week predicted the central bank will hold rates at 6.50% at its May 24 meeting, which will follow last month’s losses by the rand and renewed weakness on Tuesday.

“They will probably hold steady, with the rand showing some vulnerability,” said Dennis Dykes, chief economist at Nedbank. “It illustrates the concerns that they have about the global situation.” However, he expected a reasonably neutral statement from Reserve Bank Governor Lesetja Kganyago.

The Bank cut its main interest rate to 6.50% in March, giving a boost to the economy, and is now expected to enter a prolonged period of inactivity, with no change forecast for the next 18 months at least.

“This current oil price is putting pressure on the inflation rate, especially if you consider the value-added tax (VAT) hike, we have seen the bottom or the best of inflation,” said Stanlib economist Kevin Lings.

In February the National Treasury announced a VAT increase for the first time in two decades, which could hurt consumer demand, to cap ballooning debt and close a large revenue shortfall.

“From here inflation will move higher, that obviously makes it more difficult to justify a rate cut,” Lings added.

Still, the rate of increase in consumer prices is not expected to breach the top-end of the Reserve Bank’s 3-6% target during the forecast horizon.

Emerging market currencies, including the rand, have been under pressure in the past month from a strong dollar bolstered by the Federal Reserve’s decision to raise US rates in March and its apparent disposition to do so again.

In April a Reuters poll predicted the Fed would raise rates three more times this year.

Still the rand is expected to recoup some of its April losses against the dollar in the next 12 months – provided domestic economic growth improves.

Growth forecasts for South Africa have improved to 1.8% from 1.3% at the start of the year, even though mining and manufacturing shrank in March due to lingering policy uncertainty and lukewarm demand.

Growth for next year is expected to hit 2%.

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