THE Reserve Bank is likely to hold interest rates steady when its policy meeting ends tomorrow, even though figures the following day are set to show that inflation breached its official target range for the first time in three months. Three out of 26 economists polled by Reuters last week think that the Bank’s monetary policy committee (MPC) will lower its key repo rate by half a percentage point to 6,5% tomorrow.
The rest think that although it may be a tough decision, the Bank will keep lending rates steady for the fourth meeting in a row, as the economy is recovering while some price pressures are mounting.
“We expect interest rates to be left unchanged on balance, but it is a very close call, with almost a 50% chance of a cut instead,” says Investec economist Kgotso Radira. “The major discussion point will be SA’s economic recovery prospects, and the risks to the inflation outlook,” he said last week.
Not much has changed since the Bank’s last policy meeting in November, headed for the first time by incoming governor Gill Marcus, who replaced Tito Mboweni .
At the end of that month, official data confirmed that SA’s economy pulled out of its first recession in 17 years in the third quarter of last year, growing by 0,9% compared with the previous quarter.
Factory and mining output has improved, spurred mainly by a pick-up in demand for local exports and restocking of business inventories. But domestic demand — the economy’s main engine — is still stalled, with heavy debt costs and a million job losses last year dissuading consumers from spending.
Consumer spending has shrunk for five quarters in a row, although the pace of contraction slowed in the third quarter of last year — the latest for which data is available.
Investment, the other growth engine, is retreating at its fastest pace in more than a decade, as private firms curtail spending.
This is only being partially offset by a massive official infrastructure spending programme, which will expand the economy’s potential for growth over the next few years.
Macquarie First South is one of three institutions polled by Reuters which thinks that the Bank will trim its repo rate by half a percentage point to 6,5% tomorrow.
“The portions of the economy which interest rates have impact on are consumption and private investment, and these have been weak,” says Nazmeera Moola, a sales director at the company.
The other two institutions that expect a rate cut tomorrow are Brait and Bidvest . But another three analysts are predicting a rate cut in the first half of this year.
Their views are supported by the fact that retail sales — one of the economy’s key sectors — fell by 6,6% in November, much more sharply than expected.
Official data show that demand for credit from households and companies is shrinking at its fastest pace in 43 years. But nobody thinks a rate cut is a sure thing as inflation is set to quicken in the near term, although it should subside later.
Consumer prices are likely to have surged 6,4% in December compared to the same month in 2008, breaching the official 3% to 6% target range again for the first time since September last year.
The data from Statistics SA on Wednesday are expected to show that consumer inflation rose by 0,4% in December, according to a Reuters poll. Higher petrol prices and the “base effect” of a fall in fuel costs the previous December will have been the main factors.
The Bank has said it expects inflation to return to its target range in the second quarter of this year. But its last forecasts do not take into account plans by power utility Eskom to raise its tariffs by 35% over each of the coming three years. If approved by the national regulator next month, electricity prices could push inflation back above its target later this year.
Producer price figures on Thursday are likely to show that inflation at SA’s factories, farms and mines rose last month after falling for seven months in a row.
The producer price index is seen rising 0,3%, after a year-on-year fall of 1,2% in November.