Bloomberg News

South Africa to Delay Rate Increase to 2012, Morgan Stanley Says

July 13, 2011

July 13 (Bloomberg) -- South Africa’s central bank will probably delay its first interest rate increase since June 2008 to the first quarter of 2012 as a strong rand and lower oil prices curb price pressures, Morgan Stanley said.

Inflation will likely reach the 6 percent upper end of the inflation target by December, compared with an earlier forecast of September, Michael Kafe and Andrea Masia, economists at Morgan Stanley in Johannesburg, wrote in a report e-mailed today. They previously forecast the next interest rate increase would be in September.

The Reserve Bank, led by Governor Gill Marcus, has left its benchmark rate unchanged at a 30-year low of 5.5 percent this year to support the recovery in Africa’s biggest economy. On May 12, the bank predicted that inflation would breach the 3 percent to 6 percent target band in the first quarter temporarily. Since then, the rand has gained 2.5 percent against the dollar while oil prices have dropped 2.4 percent in New York.

The central bank “is likely to consider policy normalization only if future inflation forecasts point to a worse trajectory” than projected in May, the economists said in the report. “Our improved inflation profile therefore allows the Reserve Bank to ‘kick the can down the road,’ at least until the first quarter.”

Morgan Stanley expects the central bank to raise the key rate four times to 7.5 percent by September 2012. The Reserve Bank will make its next interest rate decision on July 21.

The rand will probably end the year at 7 to the dollar, compared with a previous estimate of 7.50, Morgan Stanley said. Inflation is likely to peak at 6.1 percent in February and ease to 5.7 percent by the end of 2012. Previously, Morgan Stanley had expected a peak of 6.3 percent and an end-year inflation rate of 6 percent.

--Editors: Jennifer M. Freedman, Karl Maier

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

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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