Bloomberg News

S. African Central Bank May Keep Main Rate Unchanged

February 01, 2006

South Africa's central bank probably will leave its benchmark interest rate at a 25-year low tomorrow as policy makers assess evidence inflation may be accelerating, a survey of economists shows.

The Reserve Bank's monetary policy committee will keep the repurchase rate at 7 percent, where it has stood since April, according to all eight economists surveyed by Bloomberg Jan. 20-27. The committee will announce its decision at about 3:30 p.m. in Pretoria tomorrow.

Consumer-price inflation accelerated to 4 percent in December, after slowing for four straight months, as farmers planted less corn, pushing up the cost of staple foods. Inflation may pick up further after crude oil surged 11 percent this year, prompting the government to raise gasoline prices from today.

``Oil prices are significantly higher than when the last meeting took place'' on Dec. 8, said Arthur Kamp, a Cape Town-based economist at Sanlam Investment Management, which oversees about $49 billion. With strong credit growth and concern about food prices, ``it is probably best for the Reserve Bank to remain neutral.''

The rand dropped as much as 0.9 percent to 6.126 against the dollar today and was at 6.122 as of 3:52 p.m. in Johannesburg.

Interest-rate forward contracts show many traders no longer expect a rate reduction. The rate on the three-month contract maturing in June was at 7.48 percent on Jan. 30, up from 6.81 percent on Jan. 16, indicating investors expect rates to rise rather than fall in the next five months.

Either Way

``The Reserve Bank will keep the door open for either a rate hike or cut,'' said Vivienne Taberer, portfolio manager at Cape Town-based Investec Asset Management, South Africa's third-biggest money manager. ``The outlook is going to be data-dependent.''

The central bank lowered its benchmark rate by a total of 6.5 percentage points in the 22 months through April. Inflation has stayed within the central bank's target range of 3 percent to 6 percent since September 2003.

Crude oil has risen 14 percent in New York since the December meeting. The 3.5 percent gain in the rand in the same period hasn't been sufficient to offset the increase, and the government is raising gasoline by 3 percent starting today.

``The rand has cushioned the blow of oil prices, but it hasn't been enough,'' said Michael Keenan, a market analyst at Econometrix Treasury Management in Johannesburg. ``The inflation outlook is still looking good, but not good enough to prompt a rate cut.''

Food Prices

Higher food costs sent producer-price inflation to an annual 5.1 percent in December, the highest in more than two years. South African corn prices surged after farmers reduced planting. White corn, a staple in southern Africa, rose 15 percent in December, and yellow corn, used in animal feed, gained 12 percent.

``One would expect more upward pressure on food prices,'' Kamp said. ``With inflation averaging about 4.5 percent this year, that would suggest interest rates should remain on hold.'' CPIX inflation, which excludes mortgages, averaged 3.9 percent last year.

A three-year consumer boom may give the central bank another reason to pause after seven rate cuts since June 2003.

Growth in private-sector credit accelerated in December to a higher-than-expected annual rate of 19.7 percent, from 18.8 percent in November, the central bank said yesterday. Economists had expected credit growth to slow.

Vehicle sales rose 26 percent last year and house prices gained 22 percent, after rising 32 percent the previous year.

``The demand side of the economy is doing exceptionally well,'' said Deon Van Zyl, head of fixed income at Cape Town-based Metropolitan Asset Managers. ``There's no need to cut rates.''

The central bank may also want to avoid stimulating demand as Finance Minister Trevor Manuel, who presents the budget on Feb. 15, will probably cut taxes and raise government spending, Van Zyl said.

``If the government spends all that money, it would be stimulatory,'' he said. ``All things point to rates remaining on hold.''

To contact the reporter on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net

To contact the editor responsible for this story: Chris Kirkham at ckirkham@Bloomberg.net


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