Forecast: repo rate will be left unchanged at 5.5%

The SARB’s monetary policy committee (MPC) starts its meeting on Tuesday the 21st of May; the decision will be published on Thursday afternoon.

What has changed since the last meeting?

The economic outlook in Europe has worsened significantly with the markets starting to factor in a Greek default and move out of the Euro. Accordingly, banking shares have taken a hit. A concern for the SARB would be a possible contagion of this into our financial markets. Deterioration in the European economy also impacts us through the trade channel as we saw with the deterioration of manufacturing data, which in turn will impact our growth prospects.

The inflation outlook has not changed much since the last meeting. Inflation is expected to increase further to about 6.4% before reverting back to target late in the year. The bank indicated some concern with the upward trend in core inflation but this will not result in a monetary policy stance change. However, the bank will need to monitor the upside risk to inflation posed by an upward move in global food prices as well as the recent rand weakness as a result of renewed risk aversion.

Another concern is the growth in unsecured lending but that does not seem to be growing at a rate that would cause the bank to increase rate to counter that. The growth in unsecured lending seem to be partly responsible for financing consumption expenditure in Q1 as the disappointing employment figures are not supportive of growth in disposable income.

The economic outlook has also not changed materially since the last meeting but the situation in Europe poses a risk to SA growth. While the bank’s mandate remains that of maintaining price stability, they are equally concerned about domestic growth and employment; keeping interest rates unchanged at this low level is supportive of both.

Consequently, my view is that the repo rate will be left unchanged at 5.5% with the prime rate at 9.00%. The SARB is unlikely to change its stance for the rest of 2012 and if a change were to occur it would be almost certainly an increase in rates and the earliest this would happen would be the first half of 2013.