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South Africa May Delay Raising Key Rate as Inflation Eases

South Africa’s central bank may keep borrowing costs unchanged tomorrow for a record 16 months after inflation slowed in February, easing concern that price pressures may be spreading in the continent’s largest economy.

The Monetary Policy Committee, led by Governor Gill Marcus, will leave the benchmark rate at 5.5 percent, according to all 18 economists surveyed by Bloomberg. Marcus is due to announce the decision in a televised press conference that begins at about 3 p.m. local time in the capital, Pretoria.

The Reserve Bank has kept the repurchase rate at the lowest level in more than 30 years, since November 2010, to support the economy’s recovery as the debt crisis in Europe worsened. Marcus may have room to postpone raising interest rates after inflation unexpectedly eased last month to just above the 3 percent to 6 percent target band.

“The favorable inflation rate has changed the tone,” Thabi Leoka, head of macroeconomic research for South Africa at Standard Bank Group Ltd., Africa’s biggest lender, said in a phone interview from Johannesburg. Slowing inflation “reduces pressure” to raise rates and makes it more likely policy makers will reduce inflation forecasts, she said.

Investors are paring bets the central bank will raise rates this year. The yield on the forward-rate agreement contract due in nine months dropped 10 basis points, or 0.1 percentage point, to 5.98 percent since the February inflation data was released on March 22.

‘Generalized’ Inflation

The statistics office said inflation unexpectedly slowed to 6.1 percent from 6.3 percent in January, compared with the 6.4 percent median estimate of 14 economists surveyed by Bloomberg.

Prior to the data, Marcus said inflation pressures may be becoming “more generalized” as demand in the economy picks up, adding to expectations the bank may be preparing to raise interest rates. Spending in the economy rose an annualized 5.1 percent in the fourth quarter, the fastest pace in more than a year, the Reserve Bank said on March 19.

The inflation figure provides “better room from what they had at the last meeting,” Jeffrey Schultz, an economist at Absa Group Ltd. (ASA), South Africa’s largest retail bank, said in an interview in Johannesburg. “It will be a slightly easier decision to make.”

Marcus said on March 15 the inflation rate will probably drop below 6 percent by the end of the year. Absa forecasts the rate will remain outside the target range in 2012, reaching 6.3 percent by December.

‘Cost-Push’ Inflation

Until the governor’s comment that price pressures may be spreading in the economy, the central bank’s view was that inflation was being driven by “cost-push” factors, such as rising food and energy costs.

“We see no core demand-side pressures,” Peter Attard Montalto, an economist at Nomura Plc in London, said in a note to clients. “We believe there is some limited evidence of real wage and energy price pass-through into core inflation, but not demand effects.”

The Reserve Bank has kept rates unchanged to support the economy as its forecasts growth will slow to an estimated 2.8 percent this year from 3.1 percent in 2011. The government says it needs growth of 7 percent a year to meet its target to cut the jobless rate to 14 percent by 2020. Unemployment is 23.9 percent, the highest of 61 nations tracked by Bloomberg.

The central bank kept the benchmark rate unchanged for 13 months to June 2006.

The rand gained 6.2 percent against the dollar this year, helping to keep price pressures in check. The currency dropped 0.1 percent to 7.6179 at 9:20 a.m. Johannesburg time.

To contact the reporter on this story: Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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