SA central bank set to keep interest rates unchanged

South African Reserve Bank Governor Lesetja Kganyago

The central bank cut the benchmark repurchase rate at which it lends to commercial banks by 25 basis points at its second meeting of the year in March, but has kept it steady at 6.5 percent since.

In turn, commercial banks have kept the prime lending rate to consumers at 10 percent since a similar March reduction.

Annual consumer inflation has risen steadily from 3.8 percent year-on-year in March to 5.1 percent in October, according to data from Statistics South Africa, but is still inside the Reserve Bank’s 3-6 percent target band.

The economy continues to struggle, dipping into a technical recession with a consecutive contraction in the second quarter. The National Treasury has cut the overall growth forecast for 2018 to 0.7 percent from the 1.5 percent predicted in February.

The rand currency has lost ground against the U.S. dollar — adding to inflation pressure — since a rally earlier in the year partly spurred by the appointment of largely respected former businessman Cyril Ramaphosa as South Africa’s president to replace the scandal-ridden Jacob Zuma.

“We think the SARB is likely to keep the policy rate at 6.5 percent,” Bank of America Merrill Lynch analysts Ferhan Salman and Rukayat Yusuf said, adding there was scope for a 25 basis point hike next January.

“We believe the lagging cyclical recovery, easing oil prices and rand recovery buy the SARB more time to assess the state of the economy in the third quarter GDP print and inflation momentum thereafter.”

There is a reasonable view that interest rates could be revised lower to help the domestic economy, according to Lukman Otunuga, a research analyst at FXTM.

But Otunuga cautioned that the “the year-to-date weakness in the rand and the risks associated with higher inflationary pressures is something that can’t be under looked”.

Although the central bank’s primary mandate is to keep price pressures contained, it must also do so with consideration for the impact of monetary policy on the overall economy. South Africans are currently grappling with unemployment of over 27 percent, tax rate increases and record-high fuel prices which have piled pressure on consumer finances.

“In view of weak domestic economic growth, members of the MPC would be cautious to raise interest rates in November, unless higher inflation expectations mean a tighter monetary policy stance is unavoidable,” said Maura Feddersen, an economist at PwC.

“Nonetheless, the SARB’s scope to keep interest rates on hold is quickly diminishing, especially in the face of growing emerging markets volatility.”

– African News Agency (ANA)