October 16, 2003
By Vernon Wessels
Johannesburg - Tito Mboweni, the governor of the Reserve Bank, will bring the country's prime lending rate to its lowest level in 15 years should the monetary policy committee cut the bank's repo rate by more than 1 percentage point today.
A cut of 1 percentage point will bring the bank's repo rate to 9 percent, forcing commercial banks to lower their benchmark lending rate to individuals and companies to 12.5 percent.
Many market analysts are optimistic there is an outside chance of a 1.5 percentage point cut, which could then bring prime to 12 percent. This would match levels last seen in 1986, according to data on Bloomberg.
The stronger rand is setting the right atmosphere for the Reserve Bank to act aggressively, as the currency has a powerful influence over what happens to prices, which the central bank has been mandated by the government to keep under control.
The rand's rally since August last year has led to three interest rate cuts totalling 3.5 percentage points since the beginning of this year.
These reductions are almost the converse of what the Reserve Bank did last year, when it hiked the repo four times at a percentage point each, following the rand's dramatic decline at the end of 2001.
By hiking rates the Reserve Bank attempts to dampen demand for credit used by households and companies to buy goods.
The rand, contrary to what many economists initially believed, strengthened each time rates were cut this year, as South Africa's rates are much higher than those in the US or Europe, thus boosting the demand for bonds and money market deposits.
Most economists expect figures that will be released on October 28 to show that the targeted measure of inflation, CPIX - headline consumer inflation less mortgage rates - had fallen below the upper end of the 3 percent to 6 percent target range last month.
CPIX slowed to 6.3 percent in August while producer price inflation, which leads consumer prices by three to six months, slowed to 0.2 percent - the lowest level in almost 23 years.
Producer price inflation was measured at 1.5 percent in July.
The Reserve Bank's challenge would now be to keep CPIX below 6 percent so that it could meet its target next year and in future, said Martin Jankelowitz, the head of market and economic research at Investment Solutions.
"They do not want to cut rates too aggressively only to weaken the rand", as the central bank would prefer a stable currency to lessen the impact on inflation, said Jankelowitz.
An interest rate cut that is too aggressive may stimulate already robust domestic demand and push up inflation.
Mboweni and the other seven members of the monetary policy committee, however, are faced with the conundrum of considering a slowing domestic economy - caused largely by the strong rand, high interest rates and weak international demand.
The rand - so far the best performing currency in the world against the dollar for the second consecutive year - is supported by a weak dollar policy and foreign investors chasing high yields provided by South Africa's relatively high interest rates and benign inflation.
But local economic conditions as well as sentiment appear to be turning against the local unit.
Réjane Woodroffe, an economist at Metropolitan Asset Managers, believes it is not certain whether the rand will remain at these levels, mainly because of a widening current account deficit.
"With the favourable base effects of the high inflation of 2002 now over, world oil prices being buoyant, higher wages, declining productivity and a currency that remains vulnerable to volatile portfolio flows, it is questionable whether the Reserve Bank can afford a rate cut of 150 basis points [1.5 percentage points] at this meeting," she said.
CPIX is expected to reach 4 percent by year-end and to average about 6.5 percent for the year. Next year's expectation is 5 percent.
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Rudolf Gouws, chief economist at RMB
"I expect the monetary policy committee to cut by 100 basis points [bps] and a further 100bps in December [or by 100bps spread between the meetings of December and February]."
The committee can almost be certain inflation will be within the target next year, so it can be more relaxed.
"But it will bear in mind that domestic spending and credit extension is lively and that the deficit on the current account is widening. Wage increases and administered price rises are running ahead of the target
Publisher: Business Report
Source: Business Report
