The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The Reserve Bank is expected to remain cautious in the week ahead, with most economists expecting interest rates to be kept unchanged, even as SA’s economic prospects continue to deteriorate.

The median forecast among 15 economists polled by Bloomberg is for the repo rate to remain at 6.5%, with three expecting a cut of 25 basis points.

The prospect of SA being downgraded to junk status by Moody’s Investors Service is the primary reason analysts expect caution from the Bank, even though inflation remains well below the midpoint of its target range of 3%-6%.

Though inflation moderated in October and November of 2019, it is likely to accelerate in the first quarter of 2020, according to Capital Economics senior emerging-markets economist John Ashbourne.

“This uptick in inflation will probably be enough to dissuade policymakers who might otherwise be tempted to cut the policy rate in an effort to support the flagging economy,” Ashbourne said.

Independent economist Elize Kruger, who expects a cut of 25 basis points, also expects the Bank to lower its 2019 and 2020 growth forecasts because of the resumption of load-shedding.

“The economy continues to be hampered by elevated fuel prices, a high tax burden, generally low confidence levels, and dismal local and global demand, while Eskom’s electricity woes put a further negative layer on the scenario,” said Kruger.

The bank is likely to cut, because although Moody’s could downgrade SA, it is unclear when this would take place, said Kruger. At the Bank’s last meeting, two out of five members favoured a cut, and moderating inflation along with strengthening of the rand since then should be enough to convince at least one additional member to cut rates, she said.

Additional clarity on how the economy performed in the fourth quarter of 2019 will emerge with the release of retail sales and mining data for November on Wednesday and Thursday, respectively.

Retail sales are expected to rise 0.8% compared with the same month in 2018. The consensus expectation is that retail sales will have picked up in November 2019 as consumers took advantage of Black Friday sales, said FNB chief economist Mamello Matikinca-Ngwenya.

“A combination of weak disposable income growth — via weak labour markets — and fragile consumer sentiment is weighing on demand,” said Matikinca-Ngwenya.

Mining output in November is expected to be weak, amid a backdrop of intermittent power outages during the month as well as weak momentum in external demand, she said.