By Helmo Preuss

Although the current high real interest rates suggest monetary policy in South Africa could be eased, the rand's volatility, higher oil prices and looming food price inflation due to drought mean that the South African Reserve Bank (SARB) is unlikely to cut interest rates in 2004, according to Vector Securities chief economist Johan Rossouw.

"As an analyst I must ultimately make a call on the most likely scenario, even though it might not be the same as what most people would like to happen or even what I would regard the most appropriate action to be. Bottom line is: we are in the mind reading game - the minds of the members of the Monetary Policy Committee (MPC) and that of the governor, Tito Mboweni in particular."

Roussouw adds that the challenge is to anticipate what the most likely outcome will be; taking cognizance of the monetary policy framework they are operating in and the general economic environment and prospects.

"I am afraid the conclusion regarding the prospects for the next MPC meeting outcome and the likelihood of further interest rate reduction is not a favourable one," Roussow wrote in a research note.

Rossouw said additional risk factors are robust consumer demand, accelerating money supply growth and fiscal stimulus, which should result in the SARB erring on the side of caution.

In 2003 the SARB cut interest rates by 550 basis points after increasing them by 400 basis points in 2002.

At the beginning of 2003, economists had expected only 300 basis points worth of cuts in 2003 with a further 100 basis points cut in 2004.

The consumer inflation rate has dropped by almost 1,300 basis points between November 2002, when it was 13.0% y/y, to only 0.4% y/y in November 2003.

This has meant that the real prime rate has moved from 4% (nominal prime rate of 17% minus consumer inflation rate of 13%) in November 2002 to 11.1% (nominal prime rate of 11.5% minus consumer inflation rate of 0.4%).

At the CPIX level, which excludes the effect of the home loan rate on consumer inflation, the real prime rate has moved from 5.7% (nominal prime rate of 17% minus CPIX of 11.3% y/y) to 7.4% (nominal prime rate of 11.5% minus CPIX of 4.1% y/y) over the same period.

The official South African GDP growth rate as measured from the production side eased to a seasonally adjusted 1.3% y/y increase in the third quarter 2003 from a 2.0% y/y rise in the second quarter 2003.

If measured from the expenditure side, the decline was even more, as it fell to 0.9% y/y from 1.9% y/y. South Africa's population growth rate is 2% y/y.

The CPIX inflation target range is from 3% y/y to 6% y/y and many economists now believe given the strength of the rand that there is greater probability that CPIX will fall below the bottom of the range rather than exceed the top of the range.

The smaller than expected 50 basis points cut at the December 2003 MPC meeting has led to caution amongst South African economists.

Some maverick economists believe that both the political and growth imperatives mean an unscheduled MPC meeting in January 2004 cannot be ruled out, especially if the US dollar slumps against the euro.

Rossouw on the other hand believes that the next move in South African interest rates is likely to be higher.

"Our reading of the current monetary environment is that there will be very limited scope, if any, for lower interest rates at the February MPC meeting. We maintain our stance of an unchanged outcome to be the most likely and for the next adjustment to be upwards - probably by late 2004," Rossouw concluded.

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