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Analysts will be watching Bank for clues

Lynley Donnelly donnellyl@businesslive.co.za

The SA Reserve Bank is not expected to move interest rates from near fivedecade lows at its monetary policy committee (MPC) meeting on Thursday, which will be the main focus of this week’s economic calendar.

The rates announcement will, however, be closely watched for any changes to its inflation and growth forecasts, along with any other signals that may indicate when the Bank could begin normalising rates again.

The benchmark rate has been at 3.5% for more than a year, in a bid to help support the economy as it works its way through the aftermath of the coronavirus and accompanying economic lockdowns.

The shock has been compounded by the recent violence and looting in KwaZulu-Natal and parts of Gauteng, and which the Bank said wiped out the benefits of a better-than-expected recovery in GDP that was building up before the unrest.

The effects of the looting notwithstanding, the economic recovery is expected to continue despite this temporary knock.

Global inflation continues to stoke worry that major central banks such as the US Federal Reserve will have to withdraw some of the expansive monetary policy support launched because of the pandemic, while other emerging-market central banks have started to raise rates in response to rising prices.

This is tempered by the rise of the Delta variant and concern that it could disrupt the global turnaround.

Though there is growing expectation that the Bank will eventually start to raise rates, there is some divergence of analyst opinions as to when this will start.

“We don’t expect [a rate hike] to happen now in September, but I think that is what they are going to try to start signalling for,” said Citi SA economist Gina Schoeman, who believes the first interest rate hike could come in November.

In a recent speech Reserve Bank governor Lesetja Kganyago explicitly outlined his preference for a 3% point target for inflation on the table, a move that would imply tighter rates in the short term.

Absa senior economist Miyelani Maluleke said in a note that while there is broad consensus that the Bank will not move on Thursday, it will be important to watch out for any clues on “possible triggers for when the MPC will want to begin withdrawing some of its exceptional monetary policy support and how quickly”.

Absa believes, however, that the first move is only likely to come in March 2022 given, among other things, the uneven nature of the recovery and expectations that inflation will remain contained despite some supply chain disruptions that are putting pressure on producer prices.

“While the ongoing pandemic-related supply chain disruptions and shortages of raw materials seem to be adding to firms’ cost pressures, there is little sign of this percolating up to the level of consumer prices,” he said.

“However, as the economy continues to gradually repair from the pandemic, the [Bank] will need to withdraw at least some of its exceptional monetary policy support to restore a positive real policy rate.”

Ahead of the MPC decision, other data out this week will include the Bank’s July leading business cycle indicator, due out on Tuesday, and consumer inflation data for August, from Stats SA on Wednesday.

The leading indicator, which points to future economic growth, had been gradually gaining momentum, before slowing somewhat in June. This is likely to have been further disrupted by the unrest that disrupted business activity in July.

CONSUMER INFLATION

Meanwhile, consumer inflation is forecast to edge up to 4.9%, according to a survey of 10 economists by Bloomberg.

This increase will mainly be due to sizeable fuel price increases in August, with petrol and diesel increasing by 91c/l and 54c/l, respectively, according to Investec’s Kamilla Kaplan.

The effect will be worsened by the low base that was established in the second half of 2020, stemming from a low fuel price increase in August 2020 followed by fuel price cuts in the subsequent months, she said. This will work to amplify the year-on-year change in the second half of 2021, Kaplan said.

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2021-09-20T07:00:00.0000000Z

2021-09-20T07:00:00.0000000Z

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