It is unlikely that SARB will reduce the interest rate at this time, however, there is a possibility for an increase later in the year.
According to reports, despite the continued decline of the oil price, which has dropped by almost 60% since June last year, it is unlikely that the South African Reserve Bank (SARB) will cut the interest rate. There is, however, a possibility of a rate increase later in the year. If the price of oil remains the same or continues to drop, it is possible that the interest rate will remain unchanged for the year.
At the World Economic Forum in Davos last week, SARB governor Lesetja Kyanyogo said that the Reserve Bank will wait to see what effect the latest drop in the price of oil will have before making any changes to policy.
In an interview with
Reuters TV he said: "The position we are taking is that in the same way that when the oil price goes up, you want to see through the cycle, you want to see second round effects kicking in before you can take any policy response, the same must be applied when the oil price goes down."
What the experts are saying
At the Nedbank VinPro Information Day, which was held on 22 January at the Cape Town International Convention Centre (CTICC), Nedbank economist Nicky Weimer said that it is unlikely that the SARB will announce a reduction in the interest rate at its Monetary Policy Committee (MPC) meeting on Thursday. However, she believes that it is possible that an increase in the interest rate could be postponed until November.
Market analyst at ETM Analytics Sean McCalgan said: "I think it is very unlikely that at this stage the SARB would consider cutting rates. Our view is that the interest rate benchmark rates will be kept unchanged for this meeting alone. We don't think that the SARB will be in a rush to decrease interest rates just yet with the Rand still in quite a fragile state."
McCalgan pointed out that the fragile Rand has been a matter of concern for SARB in past MPC meetings. As core inflation is still quite high, currently at 5.7%, SARB wants to gage the second-round effects of the fallen oil price, which McCalgan says implies that they won't necessarily react immediately to what has been happening on that front.
He believes that it is a possibility that if the price of oil continues to drop that the interest rate may decrease later in the year.
"We are still seeing oil prices come under pressure despite how far they have fallen already and with demand being quite weak still there is potential for that to run further, and if they do remain under pressure in the coming months that is likely to translate to a further alleviation on this side of headline CPIs (Consumer Price Index)."
If this were to happen, McCalgan states that there is a possibility of inflation dipping below the 4% mark. If this is coupled with a stable Rand, there is a chance that SARB may "revise its stance and consider the ramifications of falling inflation and expectations of how to counter that by reducing [interest] rates."
Other contributing factors
Peter Attard Montalto, Nomura emerging markets economist, recently said that the MPC will consider the vulnerable state of South Africa at present when considering the interest rate. This includes the weak Rand and the problems with Eskom.
On Monday 26 January Eskom implemented stage one load shedding, which soon followed by the announcement that it was raising it to level two. The constraints on the power grid are expected to last until the end of the week.
Weimer agreed that the situation at Eskom is a contributing factor to the decision that will be announced on Thursday. At the Nedbank VinPro Information Day she pointed out that the problems at Eskom impacted on South Africa's growth rate in 2015.
