SOUTH Africa’s interest rates will remain steady following this week’s three-day meeting of the Reserve Bank’s monetary policy committee (MPC).
The MPC kept the key repurchase rate at 5.5%‚ Bank governor Gill Marcus said yesterday‚ and the prime lending rate therefore remains at 9%.
But Marcus warned there would be interest rate hikes in the future.
A BDlive median consensus forecast from a survey of 12 economists had expected the repo rate to be left unchanged. Seven out of the 12 expected rates to remain on hold‚ three expected a 50basis-point hike and two a 25-basis-point increase.
The rand’s rally since January‚ a slow pick-up in domestic economic activity and moderate job creation were factors in favour of leaving rates unchanged.
This was according to economists interviewed on Wednesday ahead of the MPC statement.
The MPC has been worried that the weak rand could raise the cost of commodities such as crude oil and fan food inflation.
In January‚ it unexpectedly raised the repo rate by 50 basis points to 5.5%.
Marcus has said rate hikes were likely to be moderate due to weak economic growth. The bank forecasts the economy to grow 2.8% this year‚ slightly higher than the 2.5% that most economists project.
Economists said although the bank did not target a level of the rand‚ the currency’s appreciation against the dollar since the MPC’s January meeting would have eased inflation concerns.
The currency has since picked up and Marcus said the stronger rand had tempered inflation risks in the medium term, but also noted that upside price risks persisted as the currency remained vulnerable to shifts in global risk sentiment.
“There will be interest rate increases,” Marcus said after yesterday’s meeting.
“It is that trajectory. There should be no mistake about that,” she said, adding there would not necessarily be a change in the stance at every meeting, and hikes might not always be of the same magnitude.
The rand extended gains against the dollar on the hawkish comments to hit 10.5615, its strongest level since January. The rand gained nearly 1% against the dollar, buoyed by the interest rate decision.
Government bonds rallied and yields fell, with analysts citing relief in the market that the bank had not tightened rates immediately as some players had been pricing in.
By yesterday afternoon the rand was changing hands at 10.6050 per dollar, up 0.95% from Wednesday’s close in New York.
Although the rand maintains a weaker bias‚ it has come off its weakest levels since January.
Standard Bank rand strategist Bruce Donald said on Wednesday that the strengthening rand would ease the MPC’s “anxiety” regarding inflation.
“The most likely trigger for additional tightening by the central bank would be further bouts of weakness in the exchange rate‚” he said.
Inflation has‚ as expected‚ been rising this year and hit 5.9% year on year last month. The MPC forecasts the consumer price index to peak at 6.6% in the final quarter of this year. The bank’s next policy meeting will not be until May 22, after the May 7 general election.
Rate rises would further pressure the economy which is beset by strikes in the mining industry and annual growth languishing below 3% since the 2009 recession. – BDlive, with additional reporting by Ntsakisi Maswanganyi and Reuters