South Africa’s central bank is likely to keep interest rate unchanged on Thursday despite inflationary pressures stemming largely from a weaker rand, hamstrung mostly by concerns over the ailing economy.
The economy slipped into a recession after gross domestic product contracted by 0.7% in the second quarter following a 2.6% shrinkage in the first three months of the year with the agriculture, transport, and trade sectors struggling the most.
This puts the South African Reserve Bank (SARB) in a bind as it holds its fifth policy meeting of the year this week against the backdrop of a sharp drop in the rand since the previous meeting in July.
The SARB is set to announce its decision on the repurchase or repo rate at which it lends to commercial banks later on Thursday. It kept the repo rate unchanged at 6.5% in July but warned that inflation pressures were rising.
Although most economic and financial market analysts expect rates to stay unchanged, some are not ruling out the chance of a rise given the sharply weaker rand which is largely due to global market turmoil fanned by a trade war centred mainly on China and the United States.
The rand was trading around 14.60 against the US dollar on Thursday, compared with 13.30 on July 19, when the central bank made its last interest rate announcement.
“Overall the SARB does remain in a very unenvious position,” said Jameel Ahmad, global head of currency strategy and market research at FXTM.
“External uncertainties have left the rand victim to a significant period of market weakness that is pressuring the SARB to follow the steps taken by the Central Bank of Russia and Central Bank of the Republic of Turkey to raise interest rates this month in order to offset the threat of inflation and further currency weakness for their respective market.”
But data from Statistics South Africa this week showed that annual consumer inflation decelerated to 4.9% in August from 5.1% in July which could provide some respite to the central bank.
“The effect of this new inflation information will be an important consideration for the SARB as markets are pricing in the expectation of at least a 25-basis point increase to short-term rates,” said Luigi Marinus, portfolio manager at PPS Investments.
“Contemplating the balance between inflation concerns, recent rand weakness, increasing global interest rates and the SA consumer caught in a technical recession will make the SARB decision on interest rates a difficult one.”