SARB forecast to hike rates this year

Reserve Bank governor Gill Marcus. Photo: Simphiwe Mbokazi.

Reserve Bank governor Gill Marcus. Photo: Simphiwe Mbokazi.

Published Mar 25, 2014

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Johannesburg - South Africa's Reserve Bank will probably keep interest rates steady at Thursday's policy meeting, although increases could be on the cards later in the year as inflation pressures remain a concern.

While the central bank has always stressed its independence from government in implementing policy, a rate hike now would alienate the powerful labour union allies of President Jacob Zuma's African National Congress party as it seeks to extend its 20-year grip on power in May elections.

Earlier this month, the Reserve Bank moved to manage market expectations of steep rate hikes this year after a surprise increase in January, saying it will probably tighten policy more slowly than it did six years ago, to ease pressure on the ailing economy.

Central bank governor Gill Marcus reiterated that expectations in the short-term interest rate market for about 200 basis points worth of rate hikes this year were overdone given a negative output gap and subdued growth in household consumption.

The central bank's mandate is to balance the need to keep inflation in check with that of promoting growth in Africa's biggest economy, which has languished below 3 percent since a recession in 2009.

Twenty-three of 30 economists polled by Reuters this week expected the Reserve Bank to keep its repo rate at 5.5 percent on Thursday after lifting it by 50 basis points in January, with a recent recovery in the rand helping ease inflation pressures.

Only four stuck out for another 50 basis point increase on Thursday, while three thought the South African Reserve Bank (SARB) would break with the long-standing tradition of half a percentage point adjustments per meeting and opt for a softer 25 basis point addition.

“Having only just tightened in January, the SARB in effect took into account the deterioration in inflation we are now seeing,” said Standard Chartered analyst Razia Khan.

“The currency has stabilised. So they are relieved of the pressure to do a lot more, this soon.”

However, nearly two thirds of analysts polled felt a rate hike was inevitable in the second quarter of the year, as the rand remains vulnerable to South Africa's steep fiscal and current account deficits, making it prone to sharp losses during bouts of global risk aversion.

The rand has recouped some of the sharp losses seen at the start of the year which pushed it to five-year lows against the dollar, but it is likely to remain largely on the ropes as the U.S. Federal Reserve signals an increasingly hawkish stance, boosting the dollar.

Another sharp rand sell-off would almost certainly push domestic inflation above the central bank's 3-6 percent target band, with the gauge already drawing uncomfortably close to that at 5.9 percent year-on-year in February.

“The rand has demonstrated remarkable resilience over the past month, despite a number of adverse headlines, including a large trade deficit, electricity outages, continued industrial action and heightened geopolitical tensions,” Barclays Africa said in a note.

“We doubt that the rand will be able to sustain this recovery over the coming months.” - Reuters

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