Reserve Bank to keep rates steady on food fears

JOHANNESBURG – South Africa’s central bank will hold interest rates steady this week, wary of a possible spike in food and oil prices, and will probably keep a neutral policy stance this year, a Reuters survey showed on Friday.

The Reserve Bank’s monetary policy committee (MPC) holds its first policy meeting for 2006 on February 1-2. All 20 analysts polled predicted the MPC will leave the bank’s main repo rate unchanged at seven per cent, amid concerns about robust domestic demand and a deteriorating current account deficit on the balance of payments.Twelve of the respondents believed that interest rates would remain on hold this year, while five predicted they would be cut.Three expect an interest rate hike in 2006, while three who expect flat rates this year see them falling later.The repo rate was slashed by 6,5 percentage points between 2003 and 2005, driving prime lending rates to 10,5 per cent – their lowest level in more than two decades – and fuelling a spending spree which is driving faster economic growth.”Given the food price situation and the high oil prices, I don’t think the Reserve Bank will want to move until these risks have diminished,” said Riddle Marcus, an economist at Absa bank.Surging food prices pushed up both consumer and producer inflation in December, with the CPIX gauge watched the central bank for monetary policy rising by an annual rate of four per cent from 3,7 per cent in November.More worryingly staple maize futures – which rallied late last year on fears that farmers would plant far less crop than the previous year due to a dry weather spell – remain above R1 000 a tonne.But the rand’s sharp gains over the last couple of months has raised optimism among some economists that interest rates could be cut by at least half a percentage point this year, as currency strength keeps a lid on imported price pressures.”We are projecting a strong rand for the bulk for the year on account of high commodity prices and strong investment prospects for the country,” said ETM’s George Glynos.”This, together with an inflation environment which is below that projected two months ago, should place the Reserve Bank in a more comfortable position to consider cutting (rates) towards the third quarter, barring any oil or food price shock.”The rand scaled an eight-month peak of 5,9525 against the dollar last Monday, taking its appreciation versus the greenback so far this year to more than six per cent.It had retreated to 6,10/dollar on Friday.Advocates of a rate cut also point to the toll that the currency is inflicting on the export sector, where manufacturing and mining jobs have been lost because of declining profits.However, this view is not shared by all.”We saw that last year in April …but what difference did it make? The Reserve Bank cannot influence the exchange rate.A 50 basis point cut will not make a difference,” said Jac Laubscher, economist at Sanlam.Some economists reckon the central bank will tighten monetary policy later this year to address a deteriorating current account deficit and strong credit demand, amid expectations of further tax cuts in the 2006 budget.The current account deficit, the country’s broadest measure of trade, widened to 4,7 per cent of gross domestic product in the third quarter of 2005 from 3,7 per cent in the second quarter.This was the largest shortfall since the fourth quarter of 1983.”The current account deficit does indicate that the Reserve Bank will have to apply subtle brakes in the economy to slow consumption expenditure and slow imports,” said Colen Garrow, economist at Brait.”One can reason that, if United States with its big current account deficit is facing a weaker dollar, the same principle can apply to the rand.”Data due today is expected to show little change in credit growth, with private sector credit extension seen rising by an annual rate of 18,56 per cent in December from 18,79 per cent in November.A trade surplus of R500 million is expected after a deficit of 3,13 billion in November.- Nampa-ReutersAll 20 analysts polled predicted the MPC will leave the bank’s main repo rate unchanged at seven per cent, amid concerns about robust domestic demand and a deteriorating current account deficit on the balance of payments.Twelve of the respondents believed that interest rates would remain on hold this year, while five predicted they would be cut.Three expect an interest rate hike in 2006, while three who expect flat rates this year see them falling later.The repo rate was slashed by 6,5 percentage points between 2003 and 2005, driving prime lending rates to 10,5 per cent – their lowest level in more than two decades – and fuelling a spending spree which is driving faster economic growth.”Given the food price situation and the high oil prices, I don’t think the Reserve Bank will want to move until these risks have diminished,” said Riddle Marcus, an economist at Absa bank.Surging food prices pushed up both consumer and producer inflation in December, with the CPIX gauge watched the central bank for monetary policy rising by an annual rate of four per cent from 3,7 per cent in November.More worryingly staple maize futures – which rallied late last year on fears that farmers would plant far less crop than the previous year due to a dry weather spell – remain above R1 000 a tonne.But the rand’s sharp gains over the last couple of months has raised optimism among some economists that interest rates could be cut by at least half a percentage point this year, as currency strength keeps a lid on imported price pressures.”We are projecting a strong rand for the bulk for the year on account of high commodity prices and strong investment prospects for the country,” said ETM’s George Glynos.”This, together with an inflation environment which is below that projected two months ago, should place the Reserve Bank in a more comfortable position to consider cutting (rates) towards the third quarter, barring any oil or food price shock.”The rand scaled an eight-month peak of 5,9525 against the dollar last Monday, taking its appreciation versus the greenback so far this year to more than six per cent.It had retreated to 6,10/dollar on Friday.Advocates of a rate cut also point to the toll that the currency is inflicting on the export sector, where manufacturing and mining jobs have been lost because of declining profits.However, this view is not shared by all.”We saw that last year in April …but what difference did it make? The Reserve Bank cannot influence the exchange rate.A 50 basis point cut will not make a difference,” said Jac Laubscher, economist at Sanlam.Some economists reckon the central bank will tighten monetary policy later this year to address a deteriorating current account deficit and strong credit demand, amid expectations of further tax cuts in the 2006 budget.The current account deficit, the country’s broadest measure of trade, widened to 4,7 per cent of gross domestic product in the third quarter of 2005 from 3,7 per cent in the second quarter.This was the largest shortfall since the fourth quarter of 1983.”The current account deficit does indicate that the Reserve Bank will have to apply subtle brakes in the economy to slow consumption expenditure and slow imports,” said Colen Garrow, economist at Brait.”One can reason that, if United States with its big current account deficit is facing a weaker dollar, the same principle can apply to the rand.”Data due today is expected to show little change in credit growth, with private sector credit extension seen rising by an annual rate of 18,56 per cent in December from 18,79 per cent in November.A trade surplus of R500 million is expected after a deficit of 3,13 billion in November.- Nampa-Reuters