Mariam Isa
16 November 2009
Johannesburg — TOMORROW's interest rate decision will be the main event for local markets this week, with Gill Marcus presiding over her first monetary policy meeting since taking the helm of the Reserve Bank a week ago.
The seven-member monetary policy committee (MPC) is widely expected to keep the Bank's repo rate steady at 7% for a third successive month , although analysts say there is a real chance of a rate cut.
Improved inflation figures, unwelcome strength in the rand, and perceptions that Marcus will be more "dovish" than her predecessor, Tito Mboweni , all cast doubt over the outcome of the meeting, which starts today.
Nonetheless, 24 out of 28 analysts polled by Reuters are predicting the MPC will hold rates steady, given that pending electricity price hikes are likely to put upward pressure on inflation in the medium term.
"The forecast risk for this meeting is particularly high, with a mixed bag of political, logistical, and global factors to take into consideration," said Rand Merchant Bank (RMB) economist Carmen Nel.
Markets perceive Marcus as independent and transparent, but she is also seen to have strong ties with the labour unions, which have been demanding lower interest rates. She is also expected to take a more consensual approach to decision-making than Mboweni.
This means that if the MPC cuts the repo rate, it could fan speculation that Marcus has caved in to political pressure -- even though the decision could be justified by a mixed bag of economic data and gains in the rand.
The currency rallied to a 14- month peak at R7,29/ last month, and has clawed back most of the ground lost since the Treasury unexpectedly eased exchange controls in its medium-term budget last month.
"We expect interest rates to be left unchanged due to the bleak inflation outlook, although concerns over rand strength may prompt a cut of half a percentage point instead," said Investec economist Kgotso Radira.
The Bank has lowered its repo rate by five percentage points since December, as part of efforts to jolt SA out of recession . This is despite inflation breaching its 3%-to-6% target range since April 2007, demonstrating the Bank's flexible approach to its mandate.
There is heated debate between the government, business and labour unions whether the inflation target -- which is decided by the Treasury and implemented by the Bank -- should be modified.
Brait economist Colen Garrow thinks a half-percentage-point rate cut would not be "unreasonable" given the economic environment, which suggests SA's recovery will be prolonged and uneven.
With the September inflation reading at 6,1%, and likely to have dipped back below 6% last month, there is enough of a spread with the repo rate to accommodate such a step, he says.
Analysts are also expecting the Bank to update its forecast for inflation, which it has for some time now predicted will only return to the target range "sustainably" by the second quarter of next year.
That forecast does not take into account steeper increases in electricity prices by power utility Eskom, which wants to raise tariffs by 45% over each of the next three years to help fund its infrastructure expansion.
Analysts say increases of that magnitude would add another 0,4 percentage points on to the annual inflation rate, pushing it above the target range, and would trim economic growth significantly.
Views are divided on whether SA emerged from recession in the third quarter of this year, and retail sales figures due on Wednesday will help fill in part of the puzzle.
Economists believe that the extent of contraction in the sector, the economy's third-biggest, was likely to have lessened in September. It shrank 7% in the year to August, after a 4,1% fall in July.
Citigroup economist Jean- Francois Mercier thinks retail sales fell 5,2% compared with September last year.
Other analysts agree. RMB's Carmen Nel sees an even smaller 4,1% year-on-year contraction in retail sales, given a reprieve to consumers from lower food and petrol prices, as well as modestly easier access to credit.
A third major event scheduled for this week -- release of the Bank's biannual monetary policy review on Wednesday -- is likely to take a back seat given the proximity of the MPC meeting, analysts say.
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