Reserve Bank likely to keep interest rates unchanged
Analysts say a weak economy and lower inflation make a compelling case against a rates hike
A weak economy and lower inflation are set to convince the Reserve Bank’s monetary policy committee (MPC) to keep interest rates on hold next week.
This will come as a relief to cash-strapped consumers who face further fuel price increases and slightly higher debt service costs which have dented their confidence.
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Consumer inflation accelerated slightly in February to 4.1% year- -on-year, remaining below the mid-point of the Reserve Bank’s target range of 3%-6%, data from StatsSA showed on Wednesday.
The MPC will announce the repo rate on March 28, with economists expecting the interest rate unchanged.
“The Reserve Bank is likely to keep interest rates steady at the upcoming interest-rate-setting meeting given muted confidence, subdued growth and within-target inflation,” Momentum Investments economist Sanisha Packirisamy said.
The MPC raised the repo rate by 25 basis points in November for the first time in two years, a move which was hotly debated by the committee and resulted in a split vote.
The hike was a pre-emptive exercise in response to long-term risks to inflation, including tighter financial conditions such as interest rate hikes in the US, a weaker exchange rate, a high wage rate, oil prices and rising electricity and water tariffs.
Analysts expect inflation to remain within the target range for the rest of the year, although it is expected to tick higher in the coming months. The uptick will be due to sizeable fuel price increases in March and April that stem from a weaker rand and higher international oil prices, as well as from a sharp hike in electricity tariffs together with the fuel and Road Accident Fund levies announced in the 2019 budget. The new levies will be effective from April.
However, the economy faltered at the start of the year and persistent electricity load-shedding has threatened to dent economic growth. This could see the MPC revise down its growth forecast for the year, which is 0.2 percentage points higher than the Treasury’s, at 1.7%.
A stronger than expected performance in the retail sector in January was not enough to offset weak performance in the mining and manufacturing sectors. Retail spending showed signs of recovery in January, growing 1.2% on an annualised basis, according to data released by StatsSA on Wednesday.
“The latest round of load-shedding from Eskom probably means that the moderate improvement that was forecast for this year is under threat and economic forecasts will have to be downgraded. It also means there will be very little pressure on prices this year,” Nedbank economist Busisiwe Radebe said.
These two factors will likely convince the MPC to leave interest rates on hold for most of the year, she said.