PREVIEW-S.Africa repo rate seen down 50 bps next week

WHAT: South African Reserve Bank interest rate decision WHEN: Thursday, Nov. 18 from 1300 GMT REUTERS FORECAST The Reserve Bank will likely cut its repo rate by 50 basis points to 5.5 percent next Thursday. Analysts see 60 percent probability of a rate cut, and a 35 percent chance of rates remaining steady at 6.0 percent. Sixteen out of 21 economist polled by Reuters expected the central bank to cut its the repo rate next week, with five forecasting a no-change stance. REPO RATE CUT Although the central bank's primary mandate is to keep inflation in check, the exchange rate is likely to take centre stage at next week's policy meeting, with Finance Minister Pravin Gordhan and other officials repeatedly expressing concern the currency is overvalued. Recent data also shows inflation is well-anchored within the Reserve Bank's 3-6 percent band, while the manufacturing sector, which accounts for about 15 percent of GDP, is still struggling after contracting last year due to depressed demand. Although rates are already at near 3-decade lows after 600 basis points of cuts since December 2008, South Africa, like other emerging markets, still offers far higher yields than those in developed countries. This has led to an influx of capital inflows which have driven the rand more than 27 percent higher against the dollar since the beginning of 2009, undermining the viability of the local manufacturing sector in general and exporters in particular. "South Africa's real interest rate has risen sharply and needs a full 1 percent cut to bring the real interest rate down to its level at the start of 2010, and so cap rand strength," said Investec economist Annabel Bishop. "But the South African Reserve Bank is likely to be overly cautious and only cut by 50 basis points." REPO RATE STEADY Some analysts however think the 6 percentage points of cuts since late 2008 have not yet fully filtered through the real economy, with credit extension and money supply showing steady growth in recent months. This could be reason enough for the Reserve Bank to hold off a cut for now. The Bank will also have an eye on wage settlements earlier this year -- most of them double the inflation rate -- which pose some risk to the price outlook further down the line. These analysts believe further monetary policy easing is unlikely to do much to erode rand gains, since South Africa's yield advantage would largely remain intact. "With the SARB one of the few emerging market central banks still to be easing, the risk is that such a move (another cut) would only fuel the bond market rally further, drawing in greater inflows," said Standard Chartered analyst Razia Khan. MARKET REACTION The rand has this week given back some of the recent strong gains that pushed it to 33-month highs against the dollar as the market prices in a possible rate cut, so the currency will likely only weaken slightly on the day if rates are lowered as expected. A "no change" stance would be more of a surprise, and could trigger a sharp rally on the day, although this will also depends on what happens on global markets, which have tended to give the rand most of its direction in the last two weeks. South African forward rate agreements have priced in a 70 percent chance or so for a 50 basis point cut, although some analysts, like Gabor Ambrus of research group 4cast, believe the market pricing is too aggressive. "The odds of a cut are indeed strong but in our view they seem to be closer to 50-50 percent, than 70-30 percent," Ambrus said. "We ... expect the SARB to gather more evidence than currently available before trimming another 50 basis points off the base rate." For table on poll double click on For PDF results that include probabilities http://r.reuters.com/nav25q (Polling by Stella Mapenzauswa; Editing by Ron Askew) (For more Africa cover visit: http://af.reuters.com -- To comment on this story email: SouthAfrica.Newsroom@reuters.com) Keywords: SAFRICA RATES/ (stella.mapenzauswa@thomsonreuters.com; +27 11 775 3161; Reuters Messaging: stella.mapenzauswa.thomsonreuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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