CAPE TOWN – The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) could keep interest rates in South Africa much higher to attract capital inflows, that is according to global financial services company PwC.
The MPC is set to announce its first interest rate decision for 2018 on Thursday.
“In an environment of tighter global monetary policy, emerging markets like SA could face capital outflows, weaker investment appetite and sustained currency weakness. This could potentially prompt the SARB to keep interest rates higher in an effort to attract capital inflows,” said PwC in a focus paper earlier this week.
The reserve bank is aiming to keep inflation within a target range of 3% to 6% annually. This is in order to protect the value of the rand and the purchasing power of the South African consumers, explains PwC. Merrill Lynch of Bank of America is expecting the SARB to keep the repo rate unchanged at 6.75% on Thursday. Despite the stronger range and what the bank sees as a “window opportunity” that is created by macro fundamentals for a 25 basis-point cut.
“The SARB has communicated that, while inflation is lower currently, it could well be temporary and a reduction in long-run inflation expectations would provide a better support for lower interest rates,” said Annabel Bishop, chief economist at Investec.