Scope for SARB to keep rates on hold this week

There is scope for the South African Reserve Bank to keep interest rates unchanged at the end of its Monetary Policy Committee’s three-day meeting on Thursday‚ but the risk of further rate hikes this year remains‚ says Investec economist Kamilla Kaplan.

She said inflation considerations coupled with weak economic growth would support an unchanged interest rate decision at this week’s meeting‚ but that there is a chance of a rate hike in November‚ possibly of 25 basis points.

Consumer inflation data for August is scheduled to be released the day before the MPC announces it decision.

According to Kaplan‚ CPI inflation is forecast to have moderated to 5.8% year on year (y/y) in August from 6.0% y/y in July.

“Aiding this moderation will be the substantial negative contributions‚ to both monthly and annual headline CPI‚ stemming from the petrol price component. Some of this effect on headline CPI is likely to be countered by ongoing upward food price pressure linked to the lagged effects of the drought‚” she says.

“In terms of other considerations‚ the August CPI details are likely to confirm a continued absence of meaningful demand led pressures‚ in view of the subdued household credit extension rates‚ depressed consumer confidence and deterioration in the household financial position.”

Kaplan adds that Investec expects CPI inflation to average in the region of 6.1% this year but to return to the 3 – 6% target range in 2017 (at an average of 5.1%).

“High statistical base factors established in early 2016 will act to suppress the 2017 annual CPI inflation outcomes‚ together with a gradual dissipation of supply side shocks. In addition‚ the low international commodity price environment is expected to prevail‚ given the relatively weak global growth outlook and the persistent oversupply in a number of commodity markets.

“Moreover‚ there is scope for rand appreciation‚ absent further political upheaval‚ which would contribute to easing inflationary pressures going forward‚” Kaplan says.

These inflation considerations‚ coupled with weak domestic growth prospects‚ would support an unchanged interest rate decision at this week’s SARB MPC and subsequent meetings‚ she adds.

“However‚ as the SARB has retained its relatively hawkish bias in recent communication‚ the risk remains of another interest rate hike‚ possibly another 25bp at the November MPC‚” she says.







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