South Africa to Raise Interest Rates Despite Recession

Enterprise Television- South Africa to Raise Interest Rates Despite Recession

South African Reserve Bank will leave interest rates unchanged at 6.50 percent next week, 25 of 26 analysts predicted in a Reuters poll, after recent data showing the economy unexpectedly slipped into recession earlier this year.

However, emerging market currency mayhem will likely prompt the Bank to switch to a hiking cycle in early 2019, the poll taken in the past three days showed.

Economist at Standard Bank, Elna Moolman, said “In the context of very weak economic growth and generally subdued underlying inflation, we expect that the (Bank) will keep rates unchanged in the near term.”

However, the median forecasts showed rates are likely to rise either in January or March by 25 basis points to 6.75 percent. Six of 18 economists said the Bank would hike rates in November by 25 basis points, citing worries about a weak rand, which has lost about a quarter of its value in the last six months.

Continuum Economics wrote in a note that the Reserve Bank is unlikely to bring forward planned 2019 rate hikes to defend the rand and instead will allow the currency to act as a safety valve in the face of external events.

A separate Reuters poll suggested many emerging market currencies – like the rand – will bounce back at least partially against the dollar in a year as weakening U.S. growth momentum takes the shine off the dollar.

Inflation in South Africa is expected to average 4.8 percent this year, and then accelerate to 5.3 percent next year, staying within the Bank’s comfort range of 3-6 percent. Consumer prices rose 5.1 percent in July.

As South Africa’s rand is volatile and inflation so sticky it would be difficult to consider repo rate cuts. Only one economist predicted an easing of policy – and not until the end of next year.

Nedbank senior economist, Isaac Matshego, who expects no change in the repo rate at this month’s meeting said “The Reserve Bank is worried about a likelihood of second-round effects to inflation from the rand weakness,”.

But he noted that both demand and output are weak, which would normally suggest a rate cut was required.

After the economy unexpectedly fell into recession in the first half of year, economists slashed their 2018 growth forecast for South Africa to 0.8 percent from 1.4 percent in last month’s survey. They expect the economy to bounce back to a seasonally adjusted annualised growth rate of 2.1 percent this quarter, which would mark the end to that recession.

In a stinging blow to President Cyril Ramaphosa’s efforts to revive the economy after a decade of stagnation, the economy contracted 0.7 percent last quarter, led by declines in the agricultural, transport and retail sectors.

Next year’s expected performance was trimmed by 0.2 percentage points to 1.7 percent.

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