By Ray Faure

Banking group ABSA (ASA) is still expecting a further interest rate cut in February - but has amended its forecast to a cut of 50 basis points from 100 basis points because of the prevailing climate.

"We believe there's still scope for another rate cut in February, but the mood has changed on interest rates because of the rand, the drought and high oil prices," Absa senior treasury economist Chris Hart said.

He added that the rand, which was weak at the moment relative to where it was a short while ago and whose recent volatility was of concern, the drought, which posed a very serious threat, and the high oil prices posed serious inflation risks which were likely to keep interest rates high in order to control inflation. This meant that economic growth would be subdued.

However, he believed using interest rates to control inflation was not the solution.

"Using interest rates to control inflation is rather like trying to cool a boiling kettle with a fan rather than dealing with the root cause," Hart asserted.

"We should be looking at other measures to control inflation," he added.

He believes the producer price index (PPI) could remain negative right through to the third quarter, while the consumer price index (CPI) on a year-on-year basis for January may also be negative - which would be the first time since 1954. The last available PPI data is for November 2003 which shows a year-on-year deflation rate of 2.5% and a CPI inflation rate of 0.4% year-on-year.

On the positive side, he expects economic growth to recover with increased investment over the next year, with the investment preference shifting back to emerging markets and South African bonds, equities and property favoured over international assets of developed markets.

According to Hart, equities - although still the worst asset class over a three-year time horizon - outperformed bonds over the past year for the first time since 1999 and are expected to outperform bonds over 2004, especially if the global economy continues to grow at a reasonable pace.

But South African bonds are expected to outperform world bonds.

South African asset classes - including cash - have outperformed both emerging and developed markets over the past three years. This, according to Hart, is largely because of the recovery in the rand. "But there's a mutual reinforcing here."

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