Bank expected to hold rates steady

There is unanimous consensus that the Reserve Bank will decide to keep rates on hold in the week ahead, when data is also expected to show inflation accelerated to near the midpoint of the Bank’s 3%-6% target range at the start of the second quarter.

There is unanimous consensus that the Reserve Bank will decide to keep rates on hold in the week ahead, when data is also expected to show inflation accelerated to near the midpoint of the Bank’s 3%-6% target range at the start of the second quarter.

Rising fuel and food costs have worsened SA’s inflation outlook in 2021, but March was the 13th consecutive month that inflation has been below the 4.5% midpoint of the Bank’s target band, and most economists only expect interest rates to rise in early 2022.

SA’s contained inflation makes it more likely that the central bank will keep borrowing costs at a fivedecade low to stimulate the economy, with Bank governor Lesetja Kganyago saying in March that policymakers are likely to maintain an accommodative stance for as long as this continues.

All of the eight economists polled by Bloomberg expect the Bank’s announcement on Thursday to keep the repo rate at 3.5%.

SA’s consumer inflation numbers for April are due on Wednesday, with the median forecast among seven economists polled by Bloomberg for inflation to rise to 4.3% year on year in April, from 3.2% previously. Should the print match expectations, this will be the fastest rise in the annualised consumer price index since Covid-19 struck SA.

Elize Kruger, independent economist at Carpe Diem Research, said it is worth noting that fuel prices had dropped significantly in April 2020 amid SA’s hard lockdown, and core inflation, which excludes food and energy, remained well under control.

“Core inflation, that is not subject to the low-base phenomenon, is forecast to tick lower to 2.5% year on year vs 2.6% in March, reflecting that underlying pricing pressures remain well contained in SA, partly due to the recent strong performance of the rand exchange rate and a moderating trend in services inflation,” said Kruger.

Citibank economist Gina Schoeman agrees, saying that though inflation may peak at about 5% in May, this would be due to base effects, and the Reserve Bank might only start sounding mildly hawkish later in 2021 given contained inflation, a steady rand and a need to support SA’s economic recovery.

“SA’s economy has been so weak for so long that because we are a country that has some very big players in the retail space they have been able to use their huge economies of scale to find efficiencies,” said Schoeman.

“These big retailers are not passing through the same inflation rates that they once did in their stores,” she said.

Another big factor was the housing market, said Schoeman, with rental inflation — a big component — dipping to alltime lows before Covid-19 hit due to market oversupply.

With interest rates coming down, this had increased the number of first-time home buyers, further decreasing demand for rental property, she said.

Fears of rising global inflation had, however, spilt into markets last week, prompting the JSE’s worst day in almost three months on Thursday, after data showed US inflation surged to an almost 13-year high in April.

US Federal Reserve officials, however, quickly moved to reiterate they believe this will be transitory, and will be looking through single data points, while Kganyago has repeatedly emphasised that the Bank also looks at longer-term trends in setting policy.

Walter de Wet, senior strategy analyst at Nedbank CIB, expects the Bank to move to raise rates in early 2022, which is consistent with forward rates agreements in the market — referring to contracts used to determine the rates at which interest is charged in the future.

The Bank is likely to keep a hawkish tone despite contained inflation, said De Wet in a note, and the bias from the Bank would likely be to raise Interest rates sooner rather than later, which would help anchor expectations.

The market reaction to US inflation last week proved how important Fed policy still is, said De Wet, and indicated how things could rapidly change should the world’s most influential central bank adopt a more proactive stance in combating price pressure.

Retail sales numbers for March are also due on Wednesday, with Investec economist Kamilla Kaplan expecting a deceleration to 0.8% year-on-year growth, from 2.3% in February.

March sales are expected to have normalised somewhat, after February’s increase, which was propelled by the easing of lockdown restrictions by the government, said Kaplan in a note.

So far, data indicated that the sector’s contribution to SA’s GDP was smaller in the first quarter of 2021 than in the fourth quarter of 2020, which was consistent with survey evidence, she said.

Retailer confidence had deteriorated in the first quarter, partly on account of lower sales volume growth.