Interest rate ‘will be unchanged’

Economists unanimous in prediction that Reserve Bank will hold the line

SOUTH Africa’s Reserve Bank will keep its benchmark interest rate at 5.75 percent, following a dip in inflation due to lower oil prices, a Reuters poll forecast yesterday.

A more stable rand, since the European Central Bank’s decision on Thursday to launch quantitative easing lifted emerging market currencies, has also reduced pressure on the bank to raise rates to prop up the currency, economists said.

All 37 economists surveyed in the past week were unanimous in predicting the Reserve Bank would hold interest rates at 5.75 percent at its first monetary policy committee (MPC) meeting this year.

“The fall in oil prices and the European Central Bank’s quantitative easing provide reasons to think that the MPC’s planned rate hikes will be delayed until later in the year, or possibly 2016,” said William Jackson of Capital Economics.

The ECB took the leap on Thursday, launching a govern- ment bond-buying programme that will pump hundreds of billions of euros in new money into a sagging euro zone economy.

The rand surged to its firmest in nearly 18 months against the euro after the ECB announcement, as sentiment in emerging markets was lifted by the prospect of more cash in the global financial system.

Emerging economies benefited from US quantitative easing as the higher yields offered in emerging markets attracted fund inflows.

Africa’s most- developed economy has been mired in stagflation for the past five years, but the plunge in oil prices and a potential recovery in the euro zone could spur economic growth in South Africa.

The central bank has indicated that interest rates would continue to rise. It lifted interest rates by a cumulative 75 basis points last year, to 5.75 percent, and before the December inflation data economists had expected another rise at next week’s meeting.

Central bank governor Lesetja Kganyago, speaking to Reuters at the World Economic Forum in Davos this week, said the bank would wait to examine the second-round effects of the sharp drop in oil prices before making any policy responses.

The poll forecast the repo rate, the Reserve Bank’s benchmark, would rise to 6 percent in the third quarter, and still be at that level at the end of the year.

Jackson said inflation was still very high due to deepseated structural problems, although it slowed more than expected to 5.3 percent in December, from 5.8 percent.

Core inflation – which excludes food, non-alcoholic beverages, petrol and energy prices – remained sticky, at 0.3 percentage points shy of the Reserve Bank’s 6 percent ceiling.

“The impact of lower oil prices on inflation will eventually fade, pushing the headline inflation rate back up,” Jackson said. – Reuters