An interest rate lifeboat

There will be no interest rate hike for South Africans this month. Nor in March, nor in May, predicted Bank of America Merrill Lynch.

Even when Reserve Bank Governor Lesetja Kganyago resumes raising the interest rate, it will be by only 0.25 percentage points in July, Matthew Sharratt, an economist with Bank of America Merrill Lynch, said in his macro-outlook for South Africa yesterday.

Lower oil prices will pull inflation lower, comfortably to within the 3% to 6% band Kganyago and his team are targeting, according to Sharratt.

He said: "The 45% fall in rand-denominated oil prices since mid-2014 is set to bring sharp inflation relief. We see inflation falling to a trough of 4.2% by April 2015, before gradually rising to average 4.9% for the year."

Consumers have already tasted some of this relief with a price reduction of more than R1/l at the pump last week.

Early indications are that the fuel price will fall again next month, with the Central Energy Fund showing it is over-recovering more than R1/l on average every day so far this month.

An over-recovery forces the Department of Energy to lower prices the following month. And cheaper fuel means better growth.

Merrill Lynch estimated that a 10% decline in rand-denominated oil prices can boost economic growth up to 0.4 percentage points over the next six to twelve months.

As last year progressed, most economists, the Reserve Bank and national Treasury lowered their growth forecasts.

Nedbank's economists agreed with Sharratt about the Reserve Bank's plans. Apart from lower inflation, weak growth will be another reason for Kganyago to keep rates unchanged.

"The next round of tightening [interest rate hikes] is still expected in the second half of 2015, when US interest rates are anticipated to move higher," Nedbank said.

Sharratt thinks economic growth amounted to only 1.4% last year, but expects 2.3% this year and 2.5% in 2016.

Load-shedding and potential labour unrest still cast a shadow over the country's recovery after the five-month-long strike by 70000 workers in the platinum sector last year.

But the inflation relief could be short-lived, according to Sharratt.

He believes inflation is likely to rise sharply from late 2015.