Weakness of dollar likely to prompt bold action on interest rates, says Flax

THE weakness of the US dollar over the past year has speeded up South Africa's moves to cut interest rates - although the latest cut was probably no more than a "thinly disguised attempt" to weaken the rand, says Mike Flax, chief executive officer of the Cape-headquartered Spearhead Property Holdings.

"If that was the strategy, it backfired on the S A Reserve Bank," said Flax, "because the cut, although timeous, was definitely too small." With the rand at around R7 to the dollar and with the US currency as yet showing no signs of recovery, "bold action" from the Reserve Bank is more than likely before the year end - "despite the Reserve Bank Governor's often repeated concerns about inflation". "It is now accepted that another 200 base point cut in the repo rate is necessary before the end of this year," said Flax.

"This means that by the start of next year effective rates on home loans could be down to 10% and commercial property bond rates to around 10.5%. "We can comfortably predict that having rates at these levels will sustain the property bull run for at least a further year and will fuel more investment in the increasingly popular listed property sector - the returns of which will look good in comparison to the 6% to 7% yields from bank savings accounts likely by the year end."

The further strengthening of the property loan stock sector, coupled to Spearhead's expected growth in earnings, could, said Flax, see his company's share price rise by a further 20% in 2004 - taking it to around the R15 level. "We are predicting further growth but this will not be as spectacular as it was in 2002/2003," said Flax.

Spearhead's share price rose by just on 50% in that period. Flax estimates that Spearhead in the year ahead could experience a 20% capital growth and a 10% increase in earnings, giving an overall increase of around 30%.

Asked how long he sees the "sick dollar syndrome" continuing to give South Africa a stronger rand, Flax said, "Many reputable commentators are now suggesting that the weak dollar will be around for some time to come. "This would put the rand and the South African economy into a normalisation phase with our interest and inflation rates closer aligned to those of the developed world - which, again, would be beneficial to the property sector."