Analysts are divided on the prospects for South Africa’s monetary policy ahead of the central bank’s three-day rate setting meeting that started on Tuesday (July 15), with predictions ranging from rates to remain unchanged to a hike by up to 50bps.
At its latest meeting in May, the South African Reserve Bank (SARB) kept its key repo rate unchanged at 5.5%, saying it continues to face “the difficult dilemma” of dealing with rising inflation and a deteriorating domestic economic growth outlook. It reiterated its view that the economy is in a rising interest rate cycle, and interest rates will have to be normalised in due course, adding that this does not mean that rates will be raised at each meeting, or by the same amount each time. SARB also noted that its future decisions will be data-dependent and determined by developments in the inflation outlook and inflation expectations.
According to the latest available data, South Africa’s annual headline inflation accelerated to a 5-year high of 6.6% in May from 6.1% the month before. The reading overshot SARB’s 3%-6% target range, something the bank had expected, but it was higher than its forecast. In its May monetary policy review, SARB saw moderating risks to inflation and revised down its 2014 headline inflation outlook to an average of 6.2% from previously expected 6.3%, with a peak of 6.5% (previously 6.6%) anticipated in Q4.
On the other hand, South Africa’s economic performance has remained lacklustre with growth seen staying at around zero in Q2 following a 0.6% q/q contraction in Q1. The five-month platinum strike that was blamed as the major culprit for the GDP contraction ended in late June, but it was followed by an ongoing for two weeks now strike in the steel and engineering sector that involves more workers and affects more companies and industries.
According to Peter Attard Montalto, a research analyst on South Africa at London-based Nomura, quoted by Business Report, the ongoing strike would concern the central bank more than the platinum strike, given not only the higher number of workers involved but also that a large pay increase would be much more easily transmitted to other sectors of the economy. Attard Montalto expects a 50bps rate hike with a strongly hawkish statement but a split decision.
Another economist, quoted by Business Report, Mamello Matikinca from Rand Merchant Bank, also expects a 50bps rate hike mainly due to “uncomfortably high” inflation expectations. On the other hand, she noted that the sluggish economy had been largely strike-related, leaving little for monetary policy to do.
Investec’s chief economist Annabel Bishop, also quoted by Business Report, predicted that rates will be left unchanged, citing the fragility of the economy subdued demand-led price pressures and anchored inflation expectations since the previous MPC meeting.
According to a Reuters poll, 18 out of 31 economists expect the repo rate to remain unchanged, 7 predict a 25bps hike, and 6 foresee a 50bps rise.
SARB is scheduled to announce its rate decision on Thursday (July 17) afternoon.
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