BUSINESS Experts expect repo rate to stay put
Reserve Bank likely to make small adjustment later in year
THE Reserve Bank will not raise its repo rate next week but will add 25 basis points in November as wage talks and higher food prices threaten to stoke inflation, a Reuters poll said.
All 31 economists surveyed in the past few days said the bank would keep its repo rate at 7.0 percent on Thursday but the median forecast suggested it would add 25 basis points at its November meeting.
The bank has upped interest rates by 200 basis points in the past two-and-a-half years.
“We think the SARB will stay on hold in July,” said Peter Worthington, economist at Absa Capital. “The SARB remains concerned about a continuing breach of consumer inflation above the target range, and is aware that despite the weakness of demand, inflation risks remain on the upside.”
Inflation is expected to average 6.6 percent, above the 3-6 percent target range this year, the consensus of econo- mists showed. That was unchanged from the previous month’s consensus.
It should slow to just above the target at 6.1 percent next year, they said.
Worthington said the SARB’s monetary policy depends significantly on how the rand behaves and the degree of pass- through to prices.
Major central banks are now pondering easier monetary policy due to escalated global political uncertainty after Britain’s vote to leave the EU late last month – with the US Federal reserve the only major bank expected to hike this year.
However, the window of opportunity for South Africa to pause a bit longer on its hiking cycle, or begin easing, could be determined by the outcome of industry- wide wage negotiations this quarter.
“Inflation expectations are increasingly coming into the focus for the SARB and hence above-inflation wage demands may induce the SARB to hike later in the year,” said Luke Doig, senior economist at Credit Guarantee Insurance.
Demand for above-inflation pay rises already look set to aggravate the central bank’s dilemma of how to keep a lid on inflation without snuffing out already slow economic growth.
This year’s wage-bargaining season has begun in the power, automotive and mining sectors, with initial demands ranging from 13 to 20 percent, above the current inflation rate of 6.1 percent.
Economists also pointed to a pickup in food inflation towards the end of the year, caused by drought, as one of the main drivers.
Growth in South Africa is expected to slow to 0.3 percent this year from 1.3 percent last year, 0.1 percentage points lower compared to last month’s poll.
The economy is expected to grow 1.2 percent next year, still not enough to create jobs for the quarter of the labour force currently unemployed. Even Nigeria, Africa’s biggest economy, is reeling from a global commodity slump that has hit exports.
Still, economists expect minimal contagion risks to South Africa from Britain’s EU vote.
Overall, emerging market currencies will probably be spared deeper sell- offs this quarter as major central banks support their respective economies. – Reuters