No rate hike expected - poll

SERVICES NEWS

Fin24/ Reuters - Nov 19th, 08:22

Johannesburg - The South African Reserve Bank (Sarb) will probably keep interest rates steady when it ends its final policy meeting of the year this week and is likely to stay on hold until at least late 2014, a Reuters poll showed on Monday. 

The Reserve Bank last cut the repo rate, at which it lends money to commercial banks, by 50 basis points to 5% in July 2012, but has left it unchanged since then, constrained by high inflation stemming from a weaker currency.

Fundamentals suggest the economy needs another cut, with growth in 2013 now seen barely above 2% after the Treasury lowered its forecast from the 2.7% seen at the start of the year.

Output from the manufacturing sector, which accounts for about 15% of GDP, contracted by 3.3% year-on-year in September, while mining production was up just 0.6%.

Household demand, traditionally a key driver of expansion, has remained lacklustre since a recession in 2009 slashed a million jobs.

But with inflation flirting with the top end of the central bank's 3-6% target band, due to import pressures linked to the rand's nearly 19% fall against the dollar this year, the Reserve Bank dare not loosen policy further.

"Even though the economy remains weak, cutting rates now would put further downward pressure on the currency, already struggling to keep its head above water," said Katrina Ell, economist at Moody's Analytics.

"We think the central bank will keep rates on hold until the second half of 2014, after which it will gradually begin hiking rates."

All 21 economists polled by Reuters expected the repo to stay at current four-decade lows this week, with 11 expecting the next move, an increase, to come in the second half of next year at the earliest.

Eight analysts see no change until 2015, while two were non-committal.

Nevertheless, the bank's seven-member monetary policy committee, chaired by governor Gill Marcus, might discuss a cut this week, given similar moves by central banks in Europe to combat high unemployment.

South Africa is in a similar boat, with about a quarter of the labour force struggling to find employment.

But unlike Europe, inflation in South Africa is far from benign, and cutting interest rates further would add to the pressure on the rand, already made vulnerable by the country's twin deficits on the current account and the budget.

"Financing the current account deficit is of paramount importance and rising bond yields elsewhere may see a decline in the attractiveness of South African securities," said Luke Doig, senior economist at Credit Guarantee Insurance.

"We do not need another inflation spurt at this stage."From Fin24.com