Weak rand won't force rate hike yet

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Independent Newspapers.

Reserve Bank governor Gill Marcus. Photo: Simphiwe Mbokazi.

Johannesburg - The rand's plunge to five-year lows against the dollar is unlikely to push the South African Reserve Bank (SARB) to hike interest rates next week, a Reuters poll forecast.

The central bank faces an unenviable mix of weakening economic growth during an election year and rising inflation, but analysts expect the Monetary Policy Committee to sit on its hands for at least the first half of this year as inflation pressures could ease.

All 34 economists surveyed by Reuters this week said the bank would keep the repo rate at which it lends to commercial banks unchanged at 40-year lows of 5 percent at a three-day policy meeting starting on Monday.

The rand, which hit 11.1960 to the dollar on Friday - its weakest in over five years and a convincing breach of the psychologically important 11.0 level - has been heavily sold during an emerging market rout in the wake of disappointing Chinese data and as investors fret over mining strikes in South Africa.

At its last meeting in November, the SARB emphasised risks to the economic growth outlook, even though it anticipated inflation staying “uncomfortably close” to the upper end of its 3-6 mandated target range.

Analysts say the tumbling currency simply heightens the SARB's dilemma, but is not enough to coerce it into hiking interest rates just yet.

“Although the rand is still misbehaving, inflation will fall within the target band while growth is moderating,” Maureen Mashiane, an economist at the Public Investment Corporation said.

Average annual inflation in 2013 was 5.7 percent, below the central bank's expectation of 5.8 percent, data showed last week.

Seventeen of the economists surveyed expect no change in the repo rate all year, while 16 expect a hike by the end of 2014 and one bank expects a 50 basis point cut in the third quarter.

The bank has kept the repo rate steady since July 2012 after an easing cycle, and has not raised rates in six years.

“There is no pressure for the SARB to hike but one is cognisant that rates are too low and at some point, they need to act,” Mashiane said.

Economists also say the pass-through from the exchange rate to prices has been muted so far although this might change if the rand falls further and the price of maize - a staple food - continues to rise from drought-fuelled record highs.

Five economists pushed out their rate hike expectations from the previous poll in November, while most kept the same view.

The SARB is expected to announce its rate decision following its policy meeting at 15:00 SA time on Wednesday. - Reuters


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