Economists expect repo rate to remain steady
Ntsakisi Maswanganyi
CONSUMERS are under immense financial pressure and growth is muted, the two factors that will probably see the Reserve Bank pressing pause on an interest rate hike after its monetary policy committee concludes its meeting on Thursday.
However, the Bank remains in a hiking cycle.
Inflation is high and inflation expectations are not looking good, but 11 economists surveyed by Business Day all expected the repo rate to remain on hold at 7%. The Bank last effected a 25 basis points interest rate hike in March.
The committee will revise its economic growth forecast for 2016 upwards after higher-than-expected growth in the second quarter. However, it may also revise its inflation outlook higher.
Inflation has been outside the 3%6% target band since the beginning of 2016. The 7% rate recorded in February is considered to have been the peak. A weak rand and high food prices have been driving inflation.
Rand Merchant Bank chief economist Ettienne le Roux said: “Based on our current economic growth and inflation estimates we think it would be appropriate for the Bank, at least for the moment, to keep interest rates flat.”
This may be the consensus expectation, but other economists have cautioned that rates could still rise — either at the committee’s last meeting for the year in November 2016 or in January 2017.
“Risk of additional hikes remains, particularly if foreign capital inflows experience another sharp drop [because of political risk] and/or upside inflation risks materialise,” said First National Bank economist Mamello Matikinca.
Senior economist at Old Mutual Investment Group Johann Els said rates could be cut in the second half of 2017, once the inflation outlook improved significantly.
When making its interest rate call, the Bank looks at how the economy and inflation will perform in 12 to 18 months rather than historical data. But this does not mean the Bank will scoff at inflation data due from Statistics SA on Wednesday and the Bureau for Economic Research’s (BER’s) inflation expectations survey for the third quarter, which will be released on Thursday.
The Bank’s leading indicator, which gives an indication of where the economy is headed in six to 12 months, comes out on Tuesday.
The BER surveys business people, trade unions and analysts on how they expect inflation to perform in 2016, 2017 and 2018.
Crucially, the Bank keeps a close watch on inflation expectations. If they are too high, the Bank has to raise rates as a buffer against real price increases in the economy.
Average five-year inflation expectations declined to 5.9% in the second quarter after remaining unchanged at 6.1% in the first quarter, the BER survey showed.
This is one of the reasons the Bank left rates unchanged in July.
Inflation has been outside the target band since January 2016 but decelerated to the top end of the target band at 6% in July. Inflation remained at 6% in August, according to a median consensus forecast from a survey of 11 economists.
Food prices, which have been rising because of production shortages brought on by drought, are still expected to stoke inflation.
Food price inflation was likely to have increased moderately to 11.6% year on year in August 2016 from 11.5% in July 2016, KADD Capital economist Elize Kruger said.
“Food price inflation is forecast to continue to rise moderately, as the lagged impact of the dreadful drought and rand exchange rate depreciation in the early months of 2016 could still filter through,” Kruger said.
She said, however, the 99c/litre decline in the petrol price in August had probably offset the increases in food prices and other items.
Food prices, which have been rising because of production shortages brought on by drought, are still expected to stoke inflation