SA expected to keep interest rates on hold on May 23

South Africa’s Reserve Bank will leave interest rates unchanged next week as it manages a tight balancing act between inflation threatening to quicken later this year and a weak growth outlook, a Reuters poll found on Friday.

All 30 economists polled in the past four days were unanimous in saying rates would be held at 6.75% on May 23 and through to at least the end of next year, chiming with other central banks which have drawn a line under tightening cycles.

“Since the last meeting, there has not been any significant change that would warrant the change in the rate stance hence we do not expect any movement next week,” said Isaac Matshego, senior economist at Nedbank.

“For the rest of the year, there is a higher risk of inflation going higher than going down, with the sharp increase on fuel prices, and we are starting to see pressure on food prices and the rand remains vulnerable.”

That is visible in inflation forecasts which show increases in every quarter until early next year. Inflation is expected to average 4.7% this year rising to 5.2% next year, within the Bank’s 3-6% target.

Still, South Africa remains under pressure from slow economic growth, with a deteriorating pace in recent years contributing to revenue shortfalls and a weakening of the financial position of state-owned companies.

This is the first macroeconomic survey since a general election last week when President Cyril Ramaphosa’s African National Congress was returned to power with a reduced majority in parliament. Ramaphosa has promised to speed up reforms to move out “of a low growth economic scenario”.

Only two of 22 economists giving forecasts for the remaining quarters of this year expect the Reserve Bank to cut rates – either in July or September.

Jeffrey Schultz at BNP Paribas said weaker growth, a benign developed market rates outlook – likely exacerbated by heightened U.S.-China trade tensions – and scope for further downside surprises to the Reserve Bank’s CPI estimates, opens the door to a more dovish central bank.

South Africa faces a long term problem of boosting growth due to bottlenecks within state-owned companies. The biggest is in power utility Eskom which might take longer to bring much needed power generation on stream than previously anticipated.

Economists have suggested South Africa can try to bypass that longer term solution by accelerating tourism initiatives such as visa regulations and an extensive rollout of internet connectivity to boost economic activity.

Growth is expected to inch up to 1.1% this year from 0.8% last year, although a nudge down from 1.3% expected last month.

The most optimistic economist said growth would accelerate to 1.6% this year while the most bearish said the economy would only expand 0.7%.

Next year it is expected to reach 1.5%, still a far-cry from the rate needed to get people hired in an economy that confirmed a jobless rate of 27.6% of the labour force in the first quarter of this year.