SA growth outlook slashed but SARB to hike rates on Jan 28 - economists

South Africa's economic outlook has been hit hard as falling demand from China becomes more apparent but a weak rand and high inflation will force the Reserve Bank to tighten policy aggressively next week, a Reuters poll found.

Nineteen of 31 economists said the central bank would raise interest rates by 50 basis points next Thursday to 6.75 percent while 11 said the Reserve Bank would raise by 25 basis points. Only one economist forecast rates unchanged.

"It is clear that the SARB will hike rates at the next meeting," said Elna Moolman at Macquarie. "The question is just whether the Bank will maintain the recent pace of 25 basis points increments or revert to the 50 basis points increments that used to be the norm."

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If majority view is realised it would be the first time since July 2014 the Bank has added 50 basis points rather than the 25 basis point additions it has made since then.

Moolman predicted a 25 basis point hike but said the risk of a more aggressive move had clearly increased and may largely depend on data - particularly the rand and oil price - in the run-up to the meeting.

A weak rand has meant South Africa has not been able to fully benefit from tumbling oil prices and inflation is expected to average at 6.0 percent this year, touching the top-end of the Reserve Bank's comfort level.

ELEPHANT IN A CHINA SHOP

This month, economists slashed growth forecasts, with the median at 0.9 percent compared with December's 1.6 percent for this year's performance and gave a 50-50 chance the country would fall into recession this year.

"Chinese demand is slowing quite considerably, we are seeing that in commodity prices and that's obviously being exacerbated through a strong U.S. dollar. It's a continuation of that," said Jeffrey Schultz, at BNP Paribas in Johannesburg.

The rand has been heavily sold in the new year, touching a fresh record at 17.9950 per dollar earlier this month as investors fretted over China's weaker growth potential and the likelihood of rising interest rates in the United States.

Growth in China's economy slowed to the weakest since the financial crisis at the end of last year while a separate Reuters poll last week suggested the Fed would raise interest rates three times this year.

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South African rates will end this year up at 7.25 percent, according to the poll, but even at that level some analysts said it won't be enough to halt the rand' s weakness.

"Currency weakness is the elephant in the room," said Mandla Maleka, economist at Eskom Treasury.

"Whilst we generally hope for exports to receive a lift through currency depreciation, this is a function of growth prospects from our trading partners."

- Reuters