SA's repo rate seen steady at 5.5%

SA's repo rate seen steady at 5.5%

ECONOMIC NEWS

Fin24 - Mar 26th 2012, 08:12

Johannesburg - The Reserve Bank will probably keep its repo rate at its current three decade lows next week to give the struggling economy more leeway, although higher electricity and fuel costs could force it to start tightening policy later in the year. 

All 24 economists polled by Reuters expect the Reserve Bank’s Monetary Policy Committee to keep the repo rate at which it lends to commercial banks unchanged at 5.5 % next Thursday, with 12 seeing no change throughout 2012.

The majority view is that the next move for rates will be up, with ten analysts expecting 50 basis points to be tacked on before the end of this year.

Only one economist sees another cut to 5.0% in the repo during the third quarter, adding to 6.5 percentage points of reductions in the two years to November 2010.

Government bonds sold off aggressively when unusually hawkish comments on inflation from Reserve Bank Governor Gill Marcus last week led some market players to price in the stronger likelihood of higher rates by year-end.

But data on Thursday showed targeted consumer inflation slowed unexpectedly to 6.1%t in February, suggesting it might ease back into the Reserve Bank’s mandated 3%-6% target band earlier than expected.

It has been above the band since November last year.

“As we have been arguing for long, economic activity is sluggish, cost side pressures are waning and inflation should fall back into the target band earlier than expected,” said HSBC in a note.

“This backdrop supports an accommodative stance on monetary policy.”

February’s inflation slowdown might however be a temporary reprieve, amid evidence consumer spending, which has remained hesitant since a recession in 2009 slashed about a million jobs, is slowly gathering pace in response to lower borrowing costs.

On March 15 Marcus said recent data seemed to suggest inflation was becoming more generalised, possibly reflecting the emergence of demand pressures, and that the Bank would monitor this trend “very carefully”.

The central bank had previously said inflation was mostly cost-push driven, partly justifying its stance of leaving the repo rate at a 30-year low over the past 16 months.

Price pressures also loom from fuel price increases, while power utility Eskom has been allowed to increase tariffs by 16%t for the 2012/13 financial year starting April, although this is less than the initially approved hike of 25.9%.

“It is becoming increasingly likely that a 50 basis point hike before the end of the year will transpire, potentially in November if not before” said Investec economist Annabel Bishop.