ECONOMIC WEEK AHEAD: Repo rate likely to mark time

The consensus forecast is that the SA Reserve Bank monetary policy committee is likely to keep the repo rate steady at 8.25% when it announces its decision on Thursday.

The Nedbank Group economic unit said risks to the inflation outlook remained relatively balanced. Some of the concerns raised at May’s monetary policy committee meeting have not materialised or receded somewhat.

The Stellenbosch University-based Bureau for Economic Research (BER) survey on inflation expectations showed some moderation over the next three years by all participants, while the rand held up better than expected in the face of political uncertainty against a relatively rangebound US dollar.

With the uncertainty relating to the elections, the shape of the new government, and the chosen policy course somewhat clearer, global forces are likely to reassert their dominance over the rand’s course this year.

Recent inflation and labour market outcomes in the US have been encouraging, leading to more dovish undertones on monetary policy from the US Federal Reserve and other major central banks. The prospect of lower US interest rates should help buoy global risk appetite and potentially support a steadier rand in the months ahead.

Domestic trading conditions also improved, with the economy enjoying a prolonged spell without load-shedding. This, combined with relatively subdued demand, should help to keep input costs and price pressures in check.

Nedbank still anticipates the first 25 basis point cut in September, followed by another of the same margin in November. The repo rate is forecast to end the year at 7.75%, taking the prime lending rate to 11.25%. 

The BER also anticipates a possible rate cut in September. It noted that several European central banks had already cut rates, and markets anticipated that the US Federal Reserve would cut in September.

Though the Reserve Bank does not explicitly follow the US Federal Reserve, the central bank does take the rand exchange rate and inflationary effects of a potentially depreciating local currency into account.

Trade data

Stats SA will release a range of May internal trade data as well as May building plan figures.

Nedbank forecasts annual growth in retail sales to remain flat at 0.6% in May. While sales are still weak, given the challenging economic environment, the positive outcomes are being driven by weak base effects. Nedbank expects growth in retail sales to pick up from the third quarter as the improvement in real incomes, due to a slower rate of inflation, gathers pace.

On the international front, the BER expects the European Central Bank (ECB) to hold its deposit rate steady next week, with markets pricing in a 92% chance of no change. Regarding the Bank of England (BOE), though it does not meet this week, the UK’s June inflation data, released Wednesday, will be critical to its decision on whether to cut rates or hold them until the August meeting. May’s inflation hit the BOE’s target at 2%, but services inflation remains high.

In Asia, Chinese GDP, industrial production, and retail sales data will be released, with expectations of slowed second-quarter growth due to weak consumer demand.