SARB likely to keep key interest rate unchanged on disappointing economic data

The recently released South Africa’s economic data was not positive. The country’s consumer price inflation accelerated to 6.4 percent in October, whereas its jobless rate rose to more than 27 percent in the September quarter. The inflation data signifies that consumer prices eased just slightly against its high of 7 percent recorded in February and continues to be stubbornly more than the South African central bank’s target corridor of 3 percent to 6 percent.

The South African Reserve Bank is greatly stuck between a rock and a hard place in the shape of the subdued economic data on the one hand and the rising depreciation pressure on the rand on the other, noted Commerzbank in a research report. During its monetary policy meeting today, the SARB is likely to keep the key rate on hold at 7 percent instead of raising it, said Commerzbank.

The central bank, in its October report, had stated that the inflation rate is anticipated to return to the target corridor in the second quarter of next year. But the greatest risk in this context is the South African rand. Apart from the global factors, political uncertainty is the main factor in the country that is exerting pressure on the currency as well as the risk of a rating downgrade.

The SARB might hike rate as a reaction to noticeable depreciation so as to offset the risks of inflation and raise the currently low levels of real interest rates as the nation depends on capital inflow because of its high current account deficit, added Commerzbank. But it is quite early for a rate hike today.