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Business & Technology
Nov 19 2012 7:45AM
 
Interest rates likely to remain flat
TEMPTING: The Reserve Bank’s decision on interest rates will influence consumer behaviour. Picture: Getty Images
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Bernard Sathekge

The burning question this week is whether the South African Reserve Bank monetary policy committee (MPC) will be tempted to ease interest rates further but analysts are more convinced that the bank will probably leave them unchanged given the unimpressive outlook for inflation.

Inflation is on an upward trajectory as a result of rising food prices such as grain and wheat products due to higher global prices and petrol prices,

despite a mild decrease of 10c/litre this month.

Some experts expressed concern that the fuel price which rose by 23c/litre in October, together with rising food prices, will push the CPI up further and that it was likely to continue rising in 2013, with the re-weighting and the re-basing of the index also contributing to the upward movement.

Investec Group analyst Annabel Bishop said while they did not believe the Bank would cut interest rates again, if that happens it may be a modest cut, possibly of less than 50 basis point.

Standard Bank economist Bruce Donald said the higher-than-expected inflation numbers, the re-weighting of the CPI basket and weak rand could take the Bank’s inflation trajectory higher and the bank is expected to hold rates.

Meganomics independent economist Collen Garrow said the MPC would be more cautious on the most two important elements such as the inflation and the output gap, which they have little control over.

“In the case of inflation, the spate of increases in administered and fuel prices are largely responsible for pushing inflation towards the upper end of the bank’s inflation target.

“In the case of GDP growth, impacting issues such as the prolific strike action which has gripped the country, give the MPC a tough time as they have no control over it,” said Garrow.

Interest rates are sitting at a 40-year low of 5% and most economists believe it may only ease in the coming year once inflation is well contained and also the volatility of the rand exchange rate supports observer’s expectations of no change in interest rates.

“The rand has lost 25% to date, the almost parallel to the 37% the local unit lost in 2001 and which forced the Mayburg Commission of Inquiry into the rand in 2002.

“The weakness in the rand does now suggest that pressure still to impact the CPI is very large in size and that will warrant some caution by the MPC,” Garrow said.

According to Garrow, at the moment the economic evidence gathered so far on important elements of GDP suggest that the domestic economy was less in need of a rate cut and more in need of direction from government policy makers.

“Ahead of the third quarter GDP data to be released next week, the MPC will probably have some insight into the impact of strikes and the effects the global economies have had on the supply sectors,” he said.

bernards@thenewage.co.za

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