South Africa central bank likely to keep main rate at 6.50pc

JOHANNESBURG: The South African Reserve Bank will probably play it safe in coming months by keeping interest rates unchanged due to a volatile exchange rate, despite an otherwise favourable inflation outlook, a Reuters poll found on Wednesday.

All but two of the 20 economists surveyed in the past week suggested rates would stay on hold on Sept. 19 at 6.50% after a quarter-point cut at the previous meeting in July. The two expect another quarter-point cut to 6.25%.

South Africa's economy is expected to have escaped recession in the second quarter, partly helped by retail sales which grew by 2.4% in June. The economy had shrunk by 3.2% in the first three months of the year.

"The return to growth increases the risk that policymakers will leave their key interest rate on hold at 6.50% next month, rather than - as we expect - cut to 6.25%," said John Ashbourne, senior emerging markets economist at Capital Economics.

"They may also be spooked by the rand's recent weakness," Ashbourne added, explaining why policymakers may opt to wait.

The rand has lost around 7% of its value since the start of this month, pressured by the increasing likelihood of a credit rating downgrade linked to a massive additional bailout for state power firm Eskom, along with signs of slowing global growth.

Still, a separate Reuters poll earlier this month suggested the rand could either firm up to 13.47 per dollar in 12 months or weaken to 15.90/$ in that period.

But the SARB does not target a specific level for the exchange rate. Like most central banks, it instead monitors the currency's impact on domestic inflation.

Inflation is expected to average 4.4% this year and 4.9% next year, slightly lower than a Reuters poll taken last month.

The economy is expected to grow 0.6% this year and expand 1.3% next year, also slightly lower than in the August poll.

"A SARB rate cut is not our mainstream scenario, especially as we expect Moody's to downgrade South Africa in November, which will already in itself prompt significant capital outflows," said Francesca Beausang, senior economist at Continuum Economics.

"If Moody's fails to downgrade South Africa and growth underperform relative to the SARB's forecast of 0.6% in 2019, then there exists a possibility of a 25 basis-points rate cut in early 2020," Beausang added.