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What will happen with the repo rate?

By Staff Writer
The South African Reserve Bank (SARB) will announce tomorrow (Thursday, 20 November) whether the repo rate will change or remain the same. Two economists put in their opinion on what they believe will happen tomorrow.
 
Sanlam Investments Economist Arthur Kamp believes that SARB should bide its time and leave its repo rate unchanged at the conclusion of its Monetary Policy Meeting this week.
 
"The inflation outlook – at least for the next 12 months – has improved materially. Given the sharp fall in oil prices, inflation forecasts are being revised lower. Indeed, on current information it is fair to argue that the annual advance in inflation peaked in mid-2014 and should slow into next year – possibly to 5% or lower by the second quarter of 2015, from 5.9% in October 2014," said Kamp.
 
Nazmeera Moola, economist and strategist at Investec Asset Management holds the same opinion as Kamp: "October's annual consumer price inflation (CPI) rate of 5.9% is very much in line with expectations and should reassure the market that underlying inflation is reasonably contained. The South African Reserve Bank (SARB) will therefore, in all likelihood, keep interest rates on hold tomorrow."
 
Medium term budget
 
Kamp went on to say that it is clear from the Medium Term Budget Policy Statement read in October 2014 that Minister Nene intends pulling in the reins.
 
"Apart from cutting planned expenditure in the years ahead, policy action may include tax rate increases in the new fiscal year. This is helpful for the Reserve Bank," said Kamp
 
However, one concern among market participants and economists is that expected hikes by the US Federal Reserve, probably sometime in 2015, may lead to renewed Rand weakness amid waning liquidity.
 
"Admittedly, the Bank's inflation-adjusted repo rate is very low. Actually, it is negative (just). However, the expected slowdown in inflation implies a shift to a positive real repo rate, even if the Bank remains on hold. Moreover, while US inflation remains low and the strength and/or sustainability of the economic upswing remains open to question, the US Federal Reserve can be expected to proceed with caution," said Kamp.
 
No reason for a hike
 
"Globally, the economic environment remains weak and expectations of rapid rate hikes in 2015 in the US have dissipated. Locally things aren't brighter: the growth outlook remains weak and consumer spending has been reined in drastically.
 
"Given these conditions, we see no reason for Governor Lesetja Kganyago to hike rates tomorrow. We expect inflation to be below 5% by the end of the first quarter of 2015," said Moola.
 
Kamp agreed with Moola by saying that all in all, a combination of slowing inflation (and lower inflation forecasts), soft private sector credit extension and weak domestic demand growth should be sufficient to convince the Reserve Bank that this is not the time to hike its repo rate.

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