The South African Reserve Bank is likely to keep its repurchase rate at 6.75 percent this week, although it will probably lower its consumer inflation projections, financial group Investec said at the weekend.
The Sarb is set to announce its decision on the repo rate on Thursday after a two-day meeting of its the Monetary Policy Committee (MPC), the first of six scheduled for 2018.
The Reserve Bank left the repo rate unchanged in November, saying it would be prudent to maintain the current stance of monetary policy in light of the high degree of uncertainty prevailing in the economy and the balance of risks.
“We expect the Sarb to keep the benchmark repo rate unchanged at 6.75 percent at (this week’s) MPC meeting. The Sarb will likely reiterate that the rand remains a key upside risk to the inflation profile and that a cautious policy stance is therefore warranted,” Investec economist Kamilla Kaplan said.
Kaplan noted that while the rand currency had strengthened by 10 percent on a nominal trade weighted basis since the last MPC meeting, it “still remains vulnerable to fiscal and sovereign credit ratings outcomes during first quarter of 2018”.
But the central bank would probably lower its CPI forecasts, particularly after the National Energy Regulator of South Africa (Nersa) awarded a lower electricity tariff increase of 5.23 percent to power utility Eskom, which had asked for 19.9 percent.
The Sarb said in November it expected inflation to average 5.2 in 2018 and 5.5 percent in 2019 and the lower turning point was expected in the first quarter of 2018 at 4.7 percent.
“It can be expected that on factoring in these various developments, the Sarb will lower their CPI inflation forecasts,” Kaplan said.
“Should the rand strengthen notably further this year, the Sarb may consider an interest rate cut on expected lower inflation.”
First National Bank Chief Economist Mamello Matikinca also did not expect the MPC to deliver any surprises on Thursday, despite inflation being well contained and a strengthening currency.
“We believe there are too many risks over the medium term to spur the committee to move in either direction,” she said.
She said the global oil price had surged to nearly $70, presenting upside risk to the inflation profile, adding that the national budget in February budget could deliver significant tax hikes and expenditure cuts in an effort to fund free higher education and provide fiscal support for ailing state firms.
“We expect the committee to highlight the risk of a wage price spiral should the public sector wage negotiations not conclude more or less in line with inflation,” the FNB economist said.
“In short, the meeting is likely to see a more balanced tone with a slight bias toward upside inflationary risks, and rates remaining unchanged.”
– African News Agency (ANA)