The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

INTEREST rates could stay at record low levels for two years and analysts say that if there are further shocks to the economy the rates could go even lower.

The Reserve Bank’s monetary policy committee (MPC) left the repo rate unchanged at 5%, with the prime interest rate at 8.5%, after its meeting this week. This was in line with expectations.

However, the MPC revised its inflation forecast for this quarter and next year upwards and lowered its growth forecasts until 2014.

Statistics South Africa said on Wednesday inflation rose to 5.6% last month, from 5.5% in September. The  Bank said it expected inflation to peak at 5.7% in the first quarter of next year, but this did not incorporate the consumer price index (CPI) weights and rebasing announced by Statistics SA earlier this month.

The Bank said the average upwards bias from the new basket would be about 0.2 percentage points. Some analysts said it could add 0.3 percentage points, which would push inflation to the upper limit of the Bank’s 3%-6% target range.

Absa Capital’s economists expect the Bank to leave rates unchanged for an extended period.

“Our base perception is for the Reserve Bank to begin tightening monetary policy late in 2014,” the economists said.

However, concerns about the global and domestic economy could increase the possibility of another rate cut. Reserve Bank governor Gill Marcus said on Thursday the domestic growth outlook had deteriorated recently as a result of the continued global slowdown and aggravated by work stoppages and labour unrest in the mining and agriculture sectors.

Nedbank’s group economic unit said interest rates could start to increase late next year, or early in 2014, but warned that deterioration in the global and domestic economies would increase the chance of another rate cut.

Annabel Bishop, economist at Investec, said while Investec did not expect further rate cuts, the Bank was likely to cut rates again if economic growth deteriorated significantly or the global outlook worsened.

However, she said such a cut would be only 0.25 percentage points.

* This article was first published in Sunday Times: Business Times