Reprieve for battling consumers

Further interest rate hikes are likely to be delayed until the second half of next year, given the significantly improved inflation outlook brought about by a sharp plunge in international oil prices, coupled with tepid growth in the economy.

However, the Reserve Bank's new governor, Lesetja Kganyago, has made it clear that monetary policy will eventually have to be tightened in step with anticipated increases in US interest rates, which would otherwise put pressure on the rand and curb capital inflows.

"It would be very nice to have monetary policy only made in South Africa," he said at a press conference following the announcement of the monetary policy committee's unanimous decision on Thursday to keep its repo rate steady at 5.75%.

"It is very difficult to ignore the effects of normalisation in the US - there is no doubt that the normalisation of interest rates in the US will have an impact on the South African economy," he said.

Normalisation refers to the process - due to take place in the US and other countries - of bringing interest rates back above inflation.

Nedbank economist Isaac Matshego said: "It seems the Reserve Bank is taking its time and will not rush into hiking rates further, although more hikes are on the way in the second half of next year."

He foresees a cumulative increase of one percentage point in interest rates during that period.

Most economists had expected the bank to keep interest rates steady at this month's meeting, after raising them by 75 basis points so far this year, but the statement that accompanied the announcement was surprisingly "dovish".

It said the risks to headline inflation were "finely balanced" - a departure from a prolonged period of earlier assessments that they were "on the upside".

Analysts also believe that any delay in US interest rate normalisation would give the committee the opportunity to keep interest rates on hold for longer, nurturing South Africa's weak growth outlook.

"Barring any major incidents, interest rates are on hold until the middle of next year," said Investec Asset Management economist Nazmeera Moola. "It is clear that the pace of normalisation will be very gradual and if the US only raises interest rates by 25 basis points next year there is scope for the Reserve Bank to do the same."

This would, however, also depend on international oil prices - which have plunged by 20% in the past two months - remaining low, and on relative stability in the rand, which the committee said was still vulnerable to changes in monetary policy in advanced economies.

Nonetheless, it maintained that low oil prices posed a "downside risk" to inflation.

Capital Economics analyst Jack Allen said he believed that if current oil prices were sustained, they would knock 0.8percentage points off headline inflation.

Food prices had also helped to improve the inflation outlook and were likely to continue moderating, globally and within South Africa, the committee said.

It predicted that headline inflation, which was 5.9% in September and October, would average 6.1% this year, down from 6.2% in its previous forecast. It was set to fall to 5.3% next year, compared with its previous estimate of 5.7%, then edge up to 5.5%, still well below its September forecast of 5.8% and further inside the official 3% to 6% inflation target.

The committee revised its economic growth forecasts downwards, predicting that the economy would expand by 1.4% this year, rather than 1.5% previously estimated; 2.5% rather than 2.8% next year; and 2.9% versus 3.1% in 2016.

Kganyago made it clear that he would make no changes in the conduct of monetary policy established by his respected predecessor, Gill Marcus.

"There is a solid foundation that has been laid - I will build on that foundation," he said.