INTEREST rates are expected to remain unchanged when the SA Reserve Bank's monetary policy committee announces its decision tomorrow.
Kgotso Radira, an economist at Investec, said the key discussions in the MPC were likely to include the euro debt crisis and potential impact on the rand exchange rate and the economy.
"Domestically, spending continues to grow steadily but there are signs that the production side of the economy slowed in the second quarter of 2011. Manufacturing production recorded muted growth in April and May and the PMI points to further weak growth in June.
"The inflation outlook has deteriorated since the start of the year, largely driven by upward price pressures from exogenous factors.
"June's CPI inflation data today will be closely watched, particularly the upward price pressure from food. We expect June's CPI inflation to come out at 5,1percent year-on-year, driven by food, domestic workers' wages, transport and rent," Radira said.
The challenge for the SARB is on the timing of the interest rate hike as growth seems to be slowing globally but inflation continues to rise.
"One reason for leaving interest rates unchanged could be that the core inflation (CPI excluding food, petrol, electricity) is still around 3,2percent year-on-year and the outlook is still relatively positive despite the total CPI being expected to be at six percent year-on-year in the fourth quarter of 2011.
"Once core inflation starts to gain traction, the SARB will have to hike interest rates. The anticipated significant rise in CPI inflation this year, from 3,7percent year-on-year in January to close to 5,5percent year-on-year by year end, means that real interest rates would subside materially at a time that inflation and demand rises if there is no monetary tightening in the second half of the year.
"Historically the MPC has always hiked interest rates in such circumstances," he said.
"The MPC makes a decision on interest rates based on available data and their view of the economy 18 months ahead. We maintain our view of an interest rate hike in November (50 basis points) but we will be looking at the MPC statement for clues on whether that holds given the signs of a slowdown in economic activity," Radira said.
Interest rate likely to remain unchanged
INTEREST rates are expected to remain unchanged when the SA Reserve Bank's monetary policy committee announces its decision tomorrow.
Kgotso Radira, an economist at Investec, said the key discussions in the MPC were likely to include the euro debt crisis and potential impact on the rand exchange rate and the economy.
"Domestically, spending continues to grow steadily but there are signs that the production side of the economy slowed in the second quarter of 2011. Manufacturing production recorded muted growth in April and May and the PMI points to further weak growth in June.
"The inflation outlook has deteriorated since the start of the year, largely driven by upward price pressures from exogenous factors.
"June's CPI inflation data today will be closely watched, particularly the upward price pressure from food. We expect June's CPI inflation to come out at 5,1percent year-on-year, driven by food, domestic workers' wages, transport and rent," Radira said.
The challenge for the SARB is on the timing of the interest rate hike as growth seems to be slowing globally but inflation continues to rise.
"One reason for leaving interest rates unchanged could be that the core inflation (CPI excluding food, petrol, electricity) is still around 3,2percent year-on-year and the outlook is still relatively positive despite the total CPI being expected to be at six percent year-on-year in the fourth quarter of 2011.
"Once core inflation starts to gain traction, the SARB will have to hike interest rates. The anticipated significant rise in CPI inflation this year, from 3,7percent year-on-year in January to close to 5,5percent year-on-year by year end, means that real interest rates would subside materially at a time that inflation and demand rises if there is no monetary tightening in the second half of the year.
"Historically the MPC has always hiked interest rates in such circumstances," he said.
"The MPC makes a decision on interest rates based on available data and their view of the economy 18 months ahead. We maintain our view of an interest rate hike in November (50 basis points) but we will be looking at the MPC statement for clues on whether that holds given the signs of a slowdown in economic activity," Radira said.
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