Johannesburg - Monetary policy was still far too tight despite the interest rate cut of 1.5 percentage points last month, according to a survey of local fund managers released yesterday by Merrill Lynch.

Fund managers now expect the Reserve Bank to cut the repo rate, the level at which the Reserve Bank lends to commercial banks, by another 2.75 percentage points to 9.25 percent over the next 12 months, which could bring the prime lending rate down to 12.75 percent.

None of the 14 fund managers who participated in the survey, conducted earlier this month, were concerned about inflation going forward, the Merrill Lynch survey found.

Pieter Laubscher, a senior economist at the Bureau for Economic Research, was more optimistic about interest rates but more guarded on inflation.

The bureau, an independent think-tank at the University of Stellenbosch, expected the prime commercial lending rate to measure 12.5 percent in eight months' time, as the Reserve Bank's monetary policy committee had space to cut rates by another 3 percentage points between August and February.

This would bring rates below those of September 2001, when the bank's repo rate was at 9.5 percent.

Laubscher expected CPIX - consumer inflation less mortgage costs - to average 5.4 percent next year. The bank has set an inflation target of between 3 percent and 6 percent.

The CPIX forecast was higher than the consensus of 4.95 percent, according to a Reuters survey.

The bureau expected CPIX to average 7.1 percent this year compared with the consensus 6.9 percent.

"The major reason for the bureau's caution regarding inflation is the fact that services inflation is still running well ahead of the inflation target and it is not clear to the bureau that the factors that are driving goods inflation lower will impact on services inflation," Laubscher said.

Services inflation measured 10 percent in April, according to the Reserve Bank's Quarterly Bulletin, while goods inflation was 8 percent.

Services include medical inflation and administered price increases that are not subject to international competition.

The bureau was also worried that productivity had slowed, which had pushed up labour costs, a major underlying cause of higher inflation.

"There is pressure to limit wage increases and the chances are good that it will remain under control and that it will not spill over into higher inflation."

But despite the concerns on inflation, there were still compelling reasons for further interest rate cuts.

Cuts totalling 3 percentage points would mean a real differential of about 7 percent, which would not cause worries in financial markets nor prompt speculation against the rand, he said.

Most economists expect the prime lending rate to be 12.5 percent by the end of the first quarter of next year, with some expecting a drop to as low as 11.5 percent. Rates may creep higher in 2005, with consensus at 13.25 percent.

The bureau had scaled down its growth forecasts for the economy to 2.2 percent this year from expectations of 2.6 percent.

Growth was expected to accelerate to 3.5 percent in 2004, Laubscher said. Consensus was at 2.3 percent for this year and 3.2 percent in 2004.