Reserve Bank keeps interest rate at present level

‘A neutral 90-day bank bill rate is now under 3.5%’.

Economic growth slowed in the second quarter and consumer prices were unchanged in August from the year-ago period, buttressing the central bank’s guidance, according to Nora Szentivanyi, an economist at JPMorgan Chase in London.

A Reuters poll forecast a 25 basis point reduction to 7.0 percent, a four-year low. Core inflation measured 5.3%, down from 5.4% in July. Nothing can move Rajan to reduce rates except the economic fundamentals.

Yet last Friday, the day after the Fed opted to keep rates on hold, the benchmark US S&P 500 equity index fell 1.6 per cent, while eurozone shares tumbled 3 per cent. The selling continued this week, with the S&P 500 dropping a further 1 per cent between Monday and Wednesday, leaving it nearly 2.6 per cent down from where it stood before the Fed decided to leave rates unchanged.

Indeed, insufficient rainfall might lead to drought in some parts of the country and put pressure on food inflation but monetary policy can not do much to contain food inflation.

Finance Minister Mehmet Simsek warned Tuesday that official targets need to be cut, and that economic growth will likely be around 3% this year. “However, the extent is uncertain, with the possibility of a temporary overshoot in a highly volatile environment”.

“Growth in gross fixed capital formation moderated to 1% in the second quarter, with general government providing the only notable increase“, said Kganyago.

Some economists say rates could be lifted in November, if by then the rand had weakened further and the inflation outlook deteriorated.

“The rand exchange rate remains an upside risk to the inflation outlook”. Markets now expect an increase in the Fed funds rate to take place sometime in the remaining three months of 2015, especially given the strengthening United States economy.

Kganyago said these developments had had an adverse effect on the outlook for commodity producers particularly in the emerging market economies like South Africa.

“This implies that current monetary policy settings are expansionary, although these models highlight some emerging risk that the neutral interest rate is falling further”, Richardson and Williams added.

The bank’s decision had been forecast by most analysts. He cited the example of Brazil which lowered its rate even as the economy was growing at a healthy seven percent, leading to a credit spree and over-spend, resulting in high inflation and slow growth later on. Easing inflation should underpin expectations from economists for the bank to keep its key interest rate on hold at 6% after hiking 25 basis points in July. “Should the recovery continue uninterrupted, wage growth should soon begin to gather pace-there is already evidence of this in the U.K.-and domestically generated cost pressures should help push inflation closer to target in both economies”.