SARB expected to leave rates unchanged

THE SOUTH African Reserve Bank (SARB) is expected to leave interest rates unchanged for the second consecutive time this year when its Monetary Policy Committee (MPC) announces its decision on Thursday.

Indicators have pointed to a depressed economic environment since the beginning of the year.

Wholesale and retail trade sales plunged into contractionary territory, while business and consumer confidence retracted in the first quarter.

Inflation, at 3.2 percent year-onyear in January, has been the only positive, remaining at the lower end of the SARB’s target band of between 3 and 6 percent.

Investec’s Kamila Kaplan said economic growth concerns were likely to continue to rank highly during the SARB’s deliberations.

Kaplan said although they forecast economic growth to increase by about 3 percent this year, much of this would come off a low base.

“We expect the SARB to keep the repo rate unchanged at 3.5 percent at this week’s MPC meeting,” Kaplan said.

“In terms of the inflation considerations, this year’s inflation outlook remains relatively benign, with our forecast average of 4.2 percent versus 3.3 percent in 2020, although there are some upward pressures coming from oil, which could push up the 2021 outcome.”

Old Mutual Investment Group’s chief economist, Johann Els, said last week the members of the MPC who had preferred a 25 basis point cut in November and in January might vote for a hold.

“They are going to keep rates unchanged and might adjust their growth forecast upwards,” Els said.

“Despite petrol price increases, we are expecting the rate of inflation to remain well contained below the target band for a variety of reasons, such as school fees and medical aid costs.”

But FXTM’s Lukman Otunuga was of a different view, saying the SARB had most likely reached the end of its easing cycle.

Otunuga said the burning question in the minds of many investors was when interest rates would be hiked.

“Given how inflation is projected to reach the 4.5 percent midpoint of the SARB’s target in the second quarter, this may offer an argument for higher rates,” Otunuga said.

“When factoring-in the sustained increase in oil prices and higherthan-expected electricity tariffs, the SARB could be forced to make a move to tame inflation.”