TIGHT monetary spending announced by Finance Minister Pravin Gordhan in his budget last month, and the recent rally in the rand, could see the Reserve Bank keep interest rates on hold at its meeting later this month.
But inflation could be the main deciding factor, according to economists interviewed last week.
The Bank’s monetary policy committee (MPC) is expected to hike interest rates again this year amid rising inflation concerns, although economists differ on the timing.
Those that had expected another 50-basis-point rate increase this month are altering their views following Mr Gordhan’s budget speech and some rallying by the rand.
Efficient Group economist Francois Stofberg said the MPC would probably increase interest rates by another 100 basis points before the end of this year.
“The MPC will either increase by 50 basis points now to try and reduce the effect of tapering from the US, although after the minister of finance’s tight fiscal restraints, they will rather choose to hold out and give South Africans a breathing opportunity,” he said.
Rand Merchant Bank (RMB) currency strategist John Cairns said the rand had firmed slightly since the last MPC meeting in January.
“Emerging market currencies including the rand were weakening very rapidly before the January MPC meeting, but now we can argue that the situation is better,” he said.
“There is a lot less panic in emerging markets. So the MPC will this month meet when the rand conditions are a lot more stable.”
The rand has rallied in recent weeks and is trading below R11/$ on a combination of better than expected local economic data.
While a more stable rand would be welcomed by the MPC, it would have to be sustained for a long period for it to have a meaningful effect on the Bank’s inflation outlook.
The outlook is for inflation to breach the upper end of the target band in the second quarter of this year and peak at a high 6.6% in the last quarter.